Jeremy Hunt has confirmed that the government will introduce a tax-free UK Isa as part of efforts to encourage more investment in British companies and offset anxiety over falling interest in the London stock market.

The Chancellor’s much-watched plan to create a UK Isa, or individual savings account, could allow consumers to put up to £5,000 into UK businesses, including shares and debt, without paying capital gains tax on any money derived from those investments.

The move would support similar high-profile plans – first announced in November’s Autumn Statement – to sell the government’s remaining 32 per cent stake in NatWest Group to consumers this summer.

In his budget speech on Wednesday, Mr Hunt said the sale was part of an effort to “create opportunities for a new generation of retail investors to participate in the public markets”. The government aims to return NatWest Bank to private ownership by 2026, nearly two decades after a £46bn bailout to the taxpayer during the 2008 financial crisis.

The British government savings bank NS&I will launch British savings bonds to provide British savers with three-year fixed interest rate protection, the UK chancellor added. The product will be available for sale in early April.

The UK Isa will add to the existing stocks and shares Isa available to UK consumers, which enables account holders to invest up to £20,000 tax-free but without any restrictions on the location of the company they can invest in.

The chancellor said the scheme was driven by “200 representatives from the City of London and our high-growth industries” and would “encourage more people to invest in UK assets” while making the UK stock market more competitive.

He said the new ISA would “ensure UK savers can benefit from the growth of the most promising UK businesses and provide these businesses with capital support to expand.”

However, Consultation document published on Wednesday It said it might also allow tax-free investment in UK government bonds, which could divert funds otherwise earmarked for UK companies.

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Brian Byrnes, head of personal finance at investment platform Moneybox, said the product was also unlikely to benefit the vast majority of retail investors. “The fact is that only a very small number of investors are currently able to reach the current tax-free limit of £20,000, and the extra £5,000 tax-free is likely to benefit only a small proportion of wealthy investors who are able to take advantage of it.

Mr Hunt did not announce any changes to the 0.5% stamp duty on direct share purchases, which lobby groups including TheCityUK and UK Finance said could discourage further stock market investment. The tax applies to any investment in shares other than exchange-traded funds (ETFs) and London’s Alternative Investment Market (AIM).

However, he pushed ahead with consultations on a new platform that would allow private companies to offer a limited number of shares for trading without having to list them fully on the public stock market. Government documents say Pisces (Private Intermittent Securities and Capital Trading System) will “allow private companies to scale and grow and will increase the pipeline for future initial public offerings in the UK”.