There is a strange contradiction at the heart of personal finance in Britain.

We are regularly encouraged to save more, invest for our futures, become less reliant on the state and take responsibility for our retirement. Yet over the past decade, successive governments have gradually made it harder to accumulate wealth outside the relatively narrow protection of pensions and ISAs.

This is not really a Conservative or Labour argument. Both have contributed to the direction of travel.

And you do not necessarily need to introduce an explicit wealth tax to tax wealth more heavily. You can simply tax more and more of the process of becoming wealthy.

One of the least visible tax increases is fiscal drag.

The Personal Allowance currently remains at £12,570, while the higher-rate Income Tax threshold in England, Wales and Northern Ireland remains £50,270. These thresholds are now scheduled to remain frozen until April 2031.

That is important because wages generally rise over time.

Someone receiving pay rises broadly in line with inflation may not actually be becoming substantially wealthier in real terms, but increasingly large portions of their income can nevertheless fall into higher tax bands.

The government does not need to announce that the 40% Income Tax rate has increased. It can simply leave the threshold where it is while nominal salaries rise around it.

That makes it progressively harder to turn earnings into investable capital.

Once someone has earned the money, paid Income Tax and National Insurance and started investing what remains, another problem appears.

The tax-free allowances on investments have been dramatically reduced.

The Capital Gains Tax annual exempt amount stood at £12,300 in 2022/23. It was cut to £6,000 for 2023/24 and then to just £3,000 from 2024/25 onwards.

That is a reduction of more than 75% in just two years. At the same time, the rates investors may pay have increased.

For most investments, the main Capital Gains Tax rates were previously 10% for basic-rate taxpayers and 20% for higher-rate taxpayers. From 30 October 2024, those rates increased to 18% and 24%.

So investors have been squeezed from both directions.

The amount of gain you can realise tax-free has collapsed, while the tax potentially payable above that allowance has increased.

Dividend investors have experienced something similar.

When the Dividend Allowance was introduced in 2016, investors could receive £5,000 of dividends before paying dividend tax.

Today, the allowance is just £500.

And from the 2026/27 tax year, the ordinary dividend tax rate has increased to 10.75%, while the upper rate has increased to 35.75%. These rates apply to dividend income above the £500 allowance.

Again, consider the message this sends.

You work. You pay tax.

You save some of what remains.

You invest it into productive companies.

Those companies generate profits and pay you dividends.

And an increasingly large portion of those returns can then become taxable as your portfolio grows. The frustrating part is that this does not only affect billionaires or people living from enormous investment portfolios.

It increasingly affects ordinary people who have spent years diligently accumulating assets.

This is perhaps the most important point.

Many investment taxes barely matter when your portfolio is small. If you have £10,000 invested, a £500 Dividend Allowance or £3,000 Capital Gains Tax exemption may seem perfectly adequate.

Build £100,000, £200,000 or £500,000 outside tax shelters and things begin to look very different.

In other words, the system becomes more restrictive precisely when long-term investing starts working.

There is a big difference between taxing somebody who is already extraordinarily wealthy and continually reducing the allowances available to somebody attempting to become financially independent.

A professional earning £60,000 or £70,000, diligently saving every month and building an investment portfolio over 20 years might eventually become wealthy.

But they probably did not start wealthy. They saved hard and made sacrifices.

There is, fortunately, a massive counterargument to everything I have written above.

The ISA.

For the 2026/27 tax year, we can still contribute £20,000 to ISAs. Investments held inside them can grow without UK Income Tax or Capital Gains Tax.

That is enormously valuable.

Someone investing the full £20,000 every year could shelter £200,000 of contributions over a decade before even considering investment growth. Pensions provide another extremely valuable tax wrapper.

These allowances mean Britain is certainly not hostile to investing altogether.

But I think the distinction is increasingly clear: the government is strongly incentivising people to build wealth inside approved tax structures while making wealth held outside them progressively less tax-efficient.

That makes understanding the tax system almost as important as choosing the investments themselves.

None of this changes my approach. Quite the opposite.

If governments are progressively reducing the amount of investment income and capital gains we can receive tax-free outside wrappers, then using those wrappers becomes even more important.

Fill the ISA where possible. Use pensions intelligently.

Think carefully before holding large investment portfolios in taxable accounts. And understand that investment returns are only one part of the equation. What ultimately matters is how much of those returns you are allowed to keep.

There will always be arguments about what level of taxation is fair, and governments arguably need revenue to fund public services. But we should also recognise the cumulative effect of policy.

Frozen tax thresholds.

A Capital Gains Tax allowance cut from £12,300 to £3,000.

A Dividend Allowance reduced to £500.

Higher taxes on investment returns.

Individually, each change can be presented as relatively modest. Stack them together over many years and the picture becomes much clearer.

Britain still gives us some excellent opportunities to build wealth.

But increasingly, you need to understand the rules of the game to make sure you actually get to keep it!

The Compounder
Long-term investing made simple.

The Compounder is for financial education and commentary only. I am not authorised or regulated by the Financial Conduct Authority and I do not provide financial advice, investment advice, or personal recommendations. Nothing published here should be taken as a recommendation to buy, sell, hold or switch any investment, fund, pension, ISA, crypto asset or financial product. Always do your own research and consider speaking to an FCA-authorised financial adviser if you are unsure.