Entrepreneurs and investors came under fire in Chancellor Jeremy Hunt’s Autumn Budget on Thursday, as the government wielded its axe on dividend payments and capital gains tax.
The dividend allowance is set to be cut from £2,000 to £1,000 in 2023 and then to £500 in April 2024.
The changes mean that by 2025, anyone receiving dividends of above this amount will be expected to pay tax on them at a rate depending on how much other income they receive.
According to Laura Suter, head of personal finance at AJ Bell, even investors with more modest portfolios will hit the tax-free allowance as a result of the new rules.
Suter said: “Someone with a portfolio of £20,000 that yields 5% a year will hit the lower tax-free allowance of £1,000 from April next year, while someone with a portfolio of £10,000 that yields 5% a year will hit the tax-free allowance of £500 from 2024.
Suter added: “This move will mean some company directors reassess whether there is a tax benefit to running their own business, which doesn’t exactly play into the Government’s hands of boosting GDP and creating more home-grown businesses.
“Slashing the dividend tax allowance but keeping the Personal Savings Allowance untouched creates an uneven playing field where you can earn more tax-free in savings income each year than you can in dividend income.”
The amount investors can earn tax-free from capital gains will also decrease dramatically. The Chancellor confirmed that from next year, the annual exempt amount for capital gains tax will be cut from £12,300 to £6,000 and reduced further to £3,000 from April 2024.
It will mean that investors will pay an extra £25 million in tax from next year and a further £275 million the year after. Combined, the move will generate £4.6 billion for the Government over the next five tax years.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said those who have diligently invested over the long term will feel “unfairly swiped” by the tax grab. However, Streeter noted that many owners of shares and property have benefitted from a sharp upswing in values over recent years.
Streeter said: “Taking a greater slice of money they make on their investments is being viewed as a fairer way of evening up the playing field, rather than clawing more money from pay packets.
“However, there is a risk that the government may still end up receiving less in tax because investors hoard assets. Tinkering with the capital gains tax exemptions will only penalise a minority of taxpayers but is still set to reap significant sums for the Treasury, which is why these measures have been swooped on. It means investors who hold money in funds or shares outside a pension or an ISA will face a greater tax burden.”
Streeter said the changes were a stark reminder of the value of ISAs and pensions in protecting investors from having to consider CGT or dividend tax.
Andrew Tully, technical director at Canada Life, echoed the sentiment: “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.
Tully said clients who are yet to use their CGT exemptions for this tax year have the next four months to do so before the changes come in and could use spousal exemption for CGT to equalise the assets before selling which means both CGT exemptions could be fully used.
For buy-to-let investors who own property as part of a limited company, these changes could prove a triple whammy following on from rises in corporation tax. They will not only have to pay more tax on dividends on profits from rent but could be faced with a significant bill when they sell up.
Streeter added: “This could discourage them from selling, causing parts of the housing market to potentially seize up. With house prices already facing a significant correction, if even more potential sellers try to avoid selling at what they perceive as a loss, fresh paralysis will add further uncertainty to a highly sensitive market.”
William Marshall, chief investment officer, Hymans Robertson Investment Services added: “For advisers, the announcement to cut relief on dividend and capital gains taxes will mean that tax efficient wrappers such as ISAs and pension schemes become more important than ever to their clients.”
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