- Chancellor is selling off NatWest while at the same time cutting the dividend allowance for small shareholders
- A £10,000 investment in NatWest will create a tax liability of between £1,385 and £3,073 for a higher rate taxpayer if held for 10 years
- The Treasury has launched a tax raid on small investors, despite the chancellor claiming to want to get Sid investing again
- More than two thirds (68%) of investors surveyed by AJ Bell would support a rise in CGT rates to restore the annual £12,300 CGT allowance
- Buckle up for a 2025 tax return nightmare
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“The chancellor announced plans for a public sale of NatWest to much fanfare in the Autumn Statement last November, claiming that ‘it’s time to get Sid investing again’.
“What he didn’t mention is the cuts he has made to the dividend and CGT allowances will leave many small shareholders with a bigger tax bill if they invest in companies like NatWest.
“The CGT allowance was cut from £12,300 in 2023 to just £3,000 from this April, with the dividend allowance slashed from £2,000 to £500 over the same time period. These allowances represent the amounts small investors can receive in gains or dividends each year without paying tax. The cuts were announced in the Autumn Statement of November 2022, amongst a raft of other tax raising measures designed to steady the ship in the wake of the mini-Budget. Consequently, the news got somewhat lost in the clamour and the chaos.”
Sid’s tax bill
“Anyone who invests over £7,460 in the prospective NatWest share offer faces paying tax on their dividends, based on the current yield of 6.7%, as that will use up all the £500 dividend allowance in place from April. On a £10,000 investment in NatWest, a higher rate taxpayer faces a dividend tax bill of £1,385 over the next 10 years if they haven’t used up their dividend allowance elsewhere. If they have other dividends using up their allowance, that tax bill rises to £3,073. (See table below. Figures based on analyst dividend estimates to 2026 and dividend growth in line with target inflation thereafter).
“Under the previous £2,000 dividend allowance, there would have been no tax to pay on this investment for a basic rate, higher rate, or additional rate taxpayer for all of this 10 year period. NatWest is just one example, but this same dynamic applies to dividends received by investors across other shares and funds, with the amount of tax payable dependent on the yield and tax circumstances of the investor.
Tax payable on £10k NatWest investment over 10 years
Sources: AJ Bell, Refinitiv, dividends assumed to rise in line with analyst estimates to FY 2026 and in line with target inflation of 2% thereafter, static dividend allowance of £500.
“An estimated 1.8 million more people will be caught in the dividend tax net due to cuts to the tax-free allowance, according to figures released by HMRC under a Freedom of Information request made by AJ Bell. The cut to the dividend allowance is also compounded by the freeze in income tax thresholds, which means more taxpayers liable to higher rates of dividend tax. The OBR estimates that by 2028-29 the deep freeze on tax thresholds will see around 4 million extra taxpayers, 3 million more moved to the higher rate of income tax, and another 400,000 paying the additional rate. That means more people paying higher rates of tax on the income they receive from dividends, as well as from employment.”
Chancellor choices
“Everyone knows that the fiscal situation is dreadful, and it could be argued shareholders need to stump up some cash like everyone else. But taxing small shareholders does seem at odds with the government’s desire to revive the UK stock market and get Sid investing again. This is particularly the case when you consider the chancellor’s CGT policy, which targets those with modest annual gains.
“Instead of cutting the annual CGT allowance from £12,300 to £3,000 the chancellor could instead have chosen to raise revenue by increasing CGT rates in line with income tax rates. That would have shifted the burden onto those with larger gains, while allowing everyone a modest sum of £12,300 of gains they can make each year without facing capital gains tax. Basic and higher rate taxpayers with annual gains under £21,600 would have been better off under this arrangement, as would top rate taxpayers with annual gains under £19,740.
“For those in retirement looking to sell investments to boost their retirement income, the difference between taking £3,000 a year and £12,300 a year without worrying about tax is substantial. A new survey of AJ Bell’s investors revealed that 68% would support an increase in the CGT rate if it meant a return of the £12,300 allowance. Only 13% preferred the current plan of keeping rates where they are and cutting the threshold to £3,000*. Given where the public finances are heading, it wouldn’t be entirely surprising to find capital gains tax rates increased in future in any case, with the reduced allowance then providing little protection for UK investors. We might end up with the worst of both worlds.”
*Source: AJ Bell Survey of 1,852 customers, February 2024.
What about ISAs?
“Investors can shelter gains and dividends from tax using an ISA wrapper, and with a £20,000 annual allowance this is definitely a step investors should take. While ISAs have undoubtedly been a terrific success story in the 25 years they have been around, many people still aren’t tuned into their benefits, particularly when it comes to Stocks and Shares ISAs as opposed to Cash ISAs. Over 18 million people hold a Cash ISA, according to HMRC, but only around 7 million have a Stocks and Shares ISA.
“There are plenty of investors out there who hold shares outside an ISA, and could be about to be knocked sideways by a wave of unexpected taxation. They can still take evasive action using the curiously named Bed and ISA, which involves selling shares and buying them straight back in an ISA. This does crystallise any capital gains to date so to avoid a tax charge, care needs to be taken to stay within the annual CGT allowance (£6,000 this tax year, £3,000 from April).”
Buckle up for a tax return nightmare in 2025
“The overall level of HMRC customer service has reached an all-time low, according to the latest report from the Committee of Public Accounts. It may yet have further depths to plunder, as next year looks like it could be even more challenging for the taxman. Taxpayers and HMRC are going to face an unholy alliance of a wider tax net, higher interest rates, and the devilish complexity of capital gains tax.
“We know more people are going to be pulled into the income tax system and pushed up into higher rates by frozen thresholds, which means more people having to complete tax returns. On top of that, next January’s returns will cover the period from April 2023 to April 2024, when cash rates rose meaningfully, and that means more people owing tax on their savings accounts. The number of people who need to pay tax on their savings interest will be 2.7 million this tax year, up 50% over twelve months (see table below).
“If that wasn’t enough, the cuts to the dividend allowance and the CGT allowance will mean even more people liable to these taxes too. Dividend taxation is relatively straightforward, and CGT can be if you have simply bought and sold an investment. However if you have bought an investment in stages, set up a regular savings plan, reinvested dividends, or sold and then bought back, CGT calculations can become extremely complicated very quickly. Next year promises to be a glorious year for accountants and a disaster zone for taxpayers and the HMRC helplines. Don’t forget to tell Sid.”
