Investors hammered as dividend and CGT allowances slashed
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In his autumn statement, the Chancellor hammered away at small investors with a tax bill on their dividends and profits from shares, funds and mutual funds.
The current tax-free allowance of £2,000 for dividend income will fall to £1,000 next April and then to just £500 from April 2024, as part of a tax attack on savers to boost the Treasury.
Meanwhile, the tax-free capital gains allowance will be reduced from £12,300 to £6,000 from April and then cut all the way to £3,000.
The move will affect personal investors with positions outside stocks and shares of Isas and Sipps, who will now pay more tax on dividends and gains on their investments when they sell. Landlords of owner-occupied homes and real estate investors will also be affected.
Investors holding assets outside of Isas and pensions will feel the pinch if the chancellor cuts the tax-free allowance
Dividends looted again for more tax
In his autumn statement, Jeremy Hunt said the tax-free allowance for dividends would be reduced from the current rate of £2,000 to £1,000 in tax year 2023, before falling to £500 in 2024.
This will generate more than £1.2bn a year from April 2025, according to the Treasury.
Investors receiving dividend payments have already faced a steady rise in their tax bill as dividend tax rates have been increased and the tax-free allowance reduced 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, from the dividend payments that many investors use to build their wealth or take as income to fund retirement.
Meanwhile, Hunt last month reintroduced the 1.25 percent 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, especially retirees who rely on dividend income to supplement their retirement.
| Yield | £2,000 allowance | £1,000 allowance | £500 allowance |
|---|---|---|---|
| 3% | £66,000 | £33,000 | £16,500 |
| 4% | £50,000 | £25,000 | £12,500 |
Figures from Canada Life show that if an investor has investments of £66,000 or less outside of an Isa yielding 3 per cent, the current £2,000 grant will cover this.
But the April 2023 and April 2024 cuts mean the value will be cut in half to £33,000 and then £16,5000.
The effect can be even worse if an investor has a higher-income portfolio that yields 4 percent.
Andrew Tully, technical director, Canada Life said: ‘This is bad news for the average investor who holds money in unpackaged portfolios outside of ISAS and pensions.
“There could be an opportunity here for these investors to take profits in these portfolios and invest in Isas and pensions, but where these contributions are already maximized, investment bonds provide a real investment opportunity without limiting investment opportunities.”
Read our guide to the best stock Isa and Sipp DIY investment platforms to protect your investments from the tax onslaught.
Small business owners that operate as a limited liability company and pay themselves out in dividends will also be affected.
Capital gains tax deduction reduced
Hunt also announced an attack on the annual capital gains tax exemption.
CGT can be charged on the profit someone makes on an asset that has appreciated in value once they come to sell it and impacts stocks, funds, mutual funds and second homes, among others.
Base rate taxpayers pay 10 per cent capital gains tax above the annual tax-free allowance of £12,300 and higher rate taxpayers pay 18 per cent.
The rates for homes are higher at 18 percent and 28 percent respectively.
Many people end up paying capital gains tax at a higher rate because gains are added to other income to determine the rate. So, for example, someone who earns £40,000 and makes a capital gain of £20,000 would see the amount above the £50,271 higher income tax threshold charged at the top tiers.
CGT generated £14.3 billion last year, with rising asset prices, house prices and frozen grants contributing to a 42 per cent increase.
There had been calls for an increase in capital gains tax rates, to equate them with income tax, but Hunt has instead opted to cut the tax-free allowance, halving it from £12,300 to £6,000, before retiring in April. drop to £3,000 by 2024.
Chris Springett, tax partner at Evelyn Partners said: “Most CGT comes from a small number of taxpayers who make big profits. The fee halving adds to the burden on investors and property owners at the other end of the CGT spectrum – those who have made relatively modest profits yet are pulled over a much lower threshold.
“In addition, these taxpayers may have to file tax returns for the first time to report capital gains, creating another administrative headache.”
How can investors avoid the capital gains tax heist?
Hunt’s plans may not be as effective as he might think, Springett warns. “Capital gains can be deferred and asset owners can delay a sale to stave off a CGT obligation, so the CGT exemption cut could deliver less than Hunt hopes.”
Tully added: ‘Using an investment bond wrapper could improve money tax efficiency as it is a non-income generating asset, as was also announced the reduction of tax year 23/24 capital gains tax exemptions from the current £12,300 to £6,000 in tax year 23/24 and then further up to £3,000 in 24/25 for individuals.
“The customers who have yet to use their CGT exemptions for this tax year have the next four months to take advantage of them before the changes roll in.
Where appropriate, the marriage exemption for CGT can be used to liquidate the assets before sale, which means that both CGT exemptions can be used in full.
“These two personal income tax changes alone will result in more investors having to file self-assessment tax returns on an annual basis.”
Compare the best DIY investment platforms and stocks Isa
Online investing 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 investment platform, stock Isa or a general investment account, the range of options seems overwhelming.
Each provider has a slightly different offering, charging more or less fees for trading or holding stocks and giving access to a different range of stocks, funds, and mutual funds.
When weighing up the right one for you, it’s important to look at the service it offers, along with handling fees and transaction fees, plus any other additional fees.
To help you compare investment accounts, we’ve put together the facts and put together a comprehensive guide to choosing the best and cheapest investment account for you.
We highlight the key players in the table below, but we encourage you to do your own research and consider the points in our full guide linked here.
>> This is Money’s full guide to the best investment platforms and ISAs
The platforms below have been independently selected by This is Money’s specialist journalists. If you open an account through links marked with an asterisk, This is Money earns an affiliate commission. We will not allow this to affect our editorial independence.
| Management fees | Loads notes | Fund trading | Default share, trust, ETF trading | Invest regularly | Dividend reinvestment | ||
|---|---|---|---|---|---|---|---|
| AJ Bell YouInvest* | 0.25% | Max £3.50 per month for stocks, trusts, ETFs. | £1.50 | £9.95 | £1.50 | € 1.50 each | More detail |
| Bestinvest* | 0.40% (0.2% for pre-built portfolios) | Account fees reduced to 0.2% for turnkey investments | Free | £4.95 | Free for funds | Free for income funds | More detail |
| Charles Stanley directly | 0.35% | No share platform fees on any transaction in that month and an annual cap of £240 | Free | £11.50 | na | na | More detail |
| Fidelity* | 0.35% on funds | £45 fee up to £7,500. Max £45 per annum for stocks, trusts, ETFs | Free | £10 | Free funds £1.50 shares, relies on ETFs | £1.50 | More detail |
| Hargreaves Lansdown* | 0.45% | Capped at £45 for stocks, trusts, ETFs | Free | £11.95 | £1.50 | 1% (£1 min, £10 max) | More detail |
| Interactive investor* | £9.99 per month or £12.99 for Sipp | £5.99 a month back in trade credit | £5.99 | £5.99 | Free | £0.99 | More detail |
| iWeb | £100 one-off | £5 | £5 | na | 2%, up to £5 | More detail | |
| Free trade* | Free for standard account £3 month for Isa | Freetrade Plus with more investment is £9.99/month inc. Is a fee | No funds | Free | na | na | More detail |
| Forefront | 0.15% | Only Vanguard Funds | Free | Free Vanguard ETFs only | Free | na | More detail |
| (Source: ThisisMoney.co.uk June 2022. Administration fees quoted annually may be monthly or quarterly) | |||||||
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