The Chancellor hammered small investors in his Autumn Statement with a tax raid on their dividends and profits from shares, funds and investment trusts.
The current £2,000 tax-free allowance for dividend income will fall to £1,000 next April and then to as low as £500 from April 2024, as part of a tax raid on savers to boost the Treasury coffers.
Meanwhile, the capital gains tax-free allowance will be hacked back from £12,300 to £6,000 from next April and then tumble all the way down to £3,000.
The move will affect personal investors with holdings outside of stocks and shares Isas and Sipps, who will now pay more tax on dividends and gains on their investments when they sell. Buy-to-let landlords and property investors will also be affected.
Investors holding assets outside of Isas and pensions will feel the pinch as the Chancellor slashes the tax-free allowance
Dividends raided for more tax again
In his Autumn Statement, Jeremy Hunt said the dividend tax-free allowance would be cut from its current rate of £2,000 to £1,000 in the 2023 tax year, before falling to £500 by 2024.
This is set to raise over £1.2billion a year from April 2025, according to the Treasury.
Investors receiving dividend payments have already faced a steady hike in their tax bill, as dividend tax rates have been increased and the tax-free allowance has been slashed from £5,000 when it was introduced in 2016 to £2,000.
Within 18 months, just a tenth of that will be tax exempt, at £500, of the dividend payouts that many investors use to build their wealth or take as income to help fund retirement.
Meanwhile, last month Hunt reinstated the 1.25 per cent increase in dividend tax rates, announced in April 2022 but scrapped by Kwasi Kwarteng in his mini-Budget.
This will be a blow to investors who hold assets outside of Isas and pensions, where dividends are tax-free, particularly pensioners who rely on dividend income to supplement their retirement.
Yield | £2,000 allowance | £1,000 allowance | £500 allowance |
---|---|---|---|
3% | £66,0000 | £33,000 | £16,500 |
4% | £50,000 | £25,000 | £12,500 |
Figures from Canada Life show if an investor has investments of £66,000 or less outside of an Isa, yielding 3 per cent, the current £2,000 allowance covers this.
But the reductions in April 2023 and April 2024 mean the value would be halved to £33,000 and then £16,5000.
The effect could be even worse if an investor has a higher income portfolio yielding 4 per cent.
Andrew Tully, technical director, Canada Life said: ‘This is bad news for the average investor holding money in unwrapped portfolios outside Isas and pensions.
‘There could be an opportunity here for these investors, to take gains in these portfolios and invest into Isas and pensions but where these contributions have already been maximised, investment bonds provide a real investment opportunity without limiting the investment options.’
Read our guide to the best stocks & shares Isa and Sipp DIY investing platforms to shelter your investments from the tax raid.
Small business owners who operate as a limited company and pay themselves in dividends will also be affected.
Capital gains tax allowance slashed
Hunt also announced an assault on the annual exemption for capital gains tax.
CGT can be charged on the profit someone makes on an asset that has increased in value once they come to sell it and affects shares, funds, investment trusts and second homes, among other assets.
Basic rate taxpayers pay 10 per cent capital gains tax above the £12,300 annual tax-free allowance and higher rate taxpayers pay 18 per cent.
On residential property rates are higher at 18 per cent and 28 per cent, respectively.
Many people end up paying higher rate capital gains tax, as profits are added to other income to decide the rate. So, for example, someone earning £40,000 and making a £20,000 capital gain, would see the amount above the £50,271 higher rate income tax threshold charged at upper levels.
CGT generated £14.3billion last year, with rising asset prices, house prices and frozen allowances contributing to a 42 per cent rise.
A hike in capital gains tax rates, to equalise them with income taxes, had been mooted but Hunt has instead opted to hack back the tax-free allowance and halved it from £12,300 to £6,000, with it then falling to £3,000 in April 2024.
Chris Springett, tax partner at Evelyn Partners said: ‘Most CGT comes from a small number of taxpayers who make large gains. The halving of the allowance increases the burden on investors and property owners at the other end of the CGT spectrum – those who have made relatively modest gains but are nevertheless drawn across a much-reduced threshold.
‘Moreover, these taxpayers may need to file tax returns for the first time to report capital gains, causing a new admin headache.’
How can investors avoid the capital gains tax raid?
Hunt’s plans may not be as effective as he might think, warns Springett. ‘Capital gains can be deferred and owners of assets can put off a sale in order to stave off a CGT liability, so the cut in the CGT exemption might raise less than Hunt is hoping.’
Tully added: ‘Using an investment bond wrapper could enhance tax efficiency of the money as it is a non-income producing asset, as also announced was the reduction in the capital gains tax exemptions from tax year 23/24 from its current £12,300 to £6,000 in tax year 23/24 and then further to £3,000 in 24/25 for individuals.
‘Those clients who are yet to use their CGT exemptions for this tax year have the next four months to utilise this before the changes come in.
‘Where appropriate the spousal exemption for CGT could be used to equalise the assets before selling which means both CGT exemptions could be fully used.
‘These two personal tax changes alone will mean more investors will have to complete self-assessment tax returns on an annual basis.’
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