With the General Election looming ever closer, both the Liberal Democrats and Labour have capital gains tax and dividends firmly set in their sights.
Both parties plan to change the way investments are taxed to bring them in line with income tax.
Currently, investors have a £12,000 capital gains allowance and a £2,000 dividend allowance. However, the Liberal Democrats have pledged to scrap the CGT allowance and instead merge capital gains and salaries through a single allowance. Under Labour, both the CGT and dividend allowance would be cut to £1,000, with both taxed at the same rate as income.
Dividend tax changes
Dividends that sit outside of an ISA are currently taxed at a rate of 7.5%, 32.5% or 38.1% for basic, higher and additional rate taxpayers.
Under Labour’s proposal, basic-rate taxpayers will see a big rise from 7.5% to 20%, but those earning £80,000 would face a double-whammy of an increase in their income tax rate and their dividends being taxed as income, taking them from a current tax rate of 32.5% to 45%.
According to calculations by investment platform AJ Bell, someone with an income of £49,000 a year and receiving £5,000 a year in dividends from their investments would pay £8,000 in tax over 10 years if Labour were in power, compared with £2,250 under the present system.
Someone with an income of £125,000 and receiving £5,000 a year in dividends would pay £20,000 over the course of 10 years, compared with the current £11,430.
Capital gains tax changes
The move to scrap the CGT allowance means investors will be taxed on up to an extra £12,000 every year, and will also see their tax rates at least double.
Higher-rate taxpayers will be hit particularly hard as their tax on gains will rise from the current 20% to 40% under Labour and to 41% under the Liberal Democrats, while those earning over £125,000 will jump from a 20% tax rate to 50% under Labour.
Figures published by AJ Bell have shown that someone with £60,000 in their investment account who gets 5% returns a year and sells their gains after 10 years will pay up to £12,210 more across 10 years under the Liberal Democrats and £7,630 more under Labour.
A basic-rate taxpayer will pay a further £2,537 more under Labour and £5,351 more under the Lib Dems, while high earners on £125,000 would pay £6,352 more under Labour and £10,324 under the Lib Dems.
Laura Suter, personal finance analyst, AJ Bell, said ISAs will likely become more popular as a result of the proposals
She said: “The annual ISA allowance is now £20,000, meaning people can squirrel more of their money away from the taxman. As this allowance has become more generous, more people have shifted their investments into ISAs, so will be protected from these planed tax hikes. We’ll see more people shifting their money into their ISA if Labour came to power, to help mitigate the tax hit.”