Investors hammered as dividend and CGT allowances slashed

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.’

Compare the best DIY investing platforms and stocks & shares Isa

Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.

When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming. 

Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts. 

When weighing up the right one for you, it’s important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.

To help you compare investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you. 

We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.

>> This is Money’s full guide to the best investing platforms and Isas 

Platforms featured below are independently selected by This is Money’s specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence. 

Admin charge Charges notes Fund dealing Standard share, trust, ETF dealing Regular investing Dividend reinvestment
AJ Bell YouInvest* 0.25%  Max £3.50 per month for shares, trusts, ETFs.  £1.50 £9.95 £1.50 £1.50 per deal  More details
Bestinvest* 0.40% (0.2% for ready made portfolios) Account fee cut to 0.2% for ready made investments Free £4.95 Free for funds  Free for income funds More details
Charles Stanley Direct 0.35%  No platform fee on shares if a trade in that month and annual max of £240 Free £11.50 n/a n/a More details
Fidelity* 0.35% on funds £45 fee up to £7,500. Max £45 per year for shares,  trusts,  ETFs Free £10 Free funds £1.50 shares, trusts ETFs £1.50 More details
Hargreaves Lansdown* 0.45% Capped at £45 for shares, trusts, ETFs Free £11.95 £1.50 1% (£1 min, £10 max) More details
Interactive Investor*  £9.99 per month or £12.99 for Sipp £5.99 per month back in trading credit £5.99 £5.99 Free £0.99 More details
iWeb £100 one-off £5 £5 n/a 2%, max £5 More details
Freetrade* Free for standard account £3 month for Isa  Freetrade Plus with more investments is £9.99/month inc. Isa fee No funds  Free  n/a  n/a  More details 
Vanguard  0.15%   Only Vanguard funds Free  Free only Vanguard ETFs  Free  n/a  More details 
(Source: June 2022. Admin charges quoted annually, may be monthly or quarterly)