AJ Bell press comment – 17 November 2022
- Dividends, capital gains and inheritance all targeted
- Enhances the attractiveness of tax shelters such as ISAs and pensions
- Could prompt asset sales to utilise CGT allowances before they expire
Laura Suter, head of personal finance at AJ Bell, comments:
“A wealth tax raid was predicted, and the Chancellor has delivered. The move to hike wealth taxes is popular with the wider public, as many don’t pay them regularly, or at all. However, it piles millions more in tax on investors and company directors.
“Combined, the moves to cut the tax-free allowances on Dividend and Capital Gains Tax will generate £4.6bn for the Government over the next five tax years – money taken directly from investors and company owners.
“This tax raid highlights the attractiveness of tax efficient products such as ISAs and pensions, because any dividends or gains generated within those products are tax free. People may also look to sell assets to realise gains and utilise this year’s £12,300 allowance before it is cut.”
Dividend tax:
“The move to slash the tax-free dividend allowance will drag millions more into paying the tax. Currently anyone with less than £2,000 of dividends a year pays no tax on that money, but in two years’ time even those earning just over £500 in dividends a year will have to pay dividend tax.
“The cut in the tax-free allowance to £1,000 from next year and £500 from April 2024 means that even investors with more modest portfolios will hit the tax-free allowance if they earn a decent income from their investments. 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.
“The savviest move for investors is to move that money into an ISA, or into a pension if they can afford to tuck it away for longer. When doing this, anyone focused on investment income should prioritise their investments that pay the highest dividends first, to try to keep more of their income from the taxman’s clutches.
“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.”
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Additional tax under Government changes to dividend tax |
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Taxpayer |
Basic rate |
Higher rate |
Additional rate |
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Additional tax between 2022/23 and 2023/24 |
£88 |
£338 |
£394 |
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Additional tax between 2022/23 and 2024/25 |
£131 |
£506 |
£590 |
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Source: AJ Bell. Calculations assume annual dividends of £2,000 or more. |
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Capital Gains Tax:
“The tax-free allowance for Capital Gains Tax had already been frozen until 2026, but Mr Hunt has gone one-leap further and cut the allowance. He has chopped the current £12,300 allowance by more than half to £6,000 from next April, and then again to £3,000 in April 2024. The move will mean that investors will pay an extra £25m in tax from next year and another £275m the year after.
“A basic-rate taxpayer with gains over the current tax-free limit will face an additional cost of £630 from next year, while an additional rate payer will be paying £1,260 more in tax. This ratchets up to an extra £930 for a basic-rate taxpayer the year after, or £1,860 for a higher-rate payer, when compared to the current system.
“Those selling a property that isn’t their main residence will face even an even bigger hit, and the move will mean landlords considering selling up could bring forward that move. By 2024 a higher-rate taxpayer would face an extra £2,604 a year in tax for selling a second home, while a basic-rate payer would be hit with £1,134 more in tax.
“Anyone who hasn’t used their current Capital Gains Tax allowance could consider cashing in gains before the tax-year end in April. Anyone with ISA allowance remaining this year can use a process called Bed-and-ISA to sell investments up to the maximum gain of £12,300 and rebuy them within their ISA. This means they will be protected from Capital Gains Tax in future years.”
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Extra Capital Gains Tax due as tax-free allowance is cut |
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Tax level |
Additional tax in 2023 |
Additional tax in 2024 |
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Basic rate - 10% |
£630 |
£930 |
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Basic rate (property) - 18% |
£1,134 |
£1,674 |
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Higher rate - 20% |
£1,260 |
£1,860 |
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High rate (property) - 28% |
£1,764 |
£2,604 |
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Source: AJ Bell. Figures assume your gains are higher than the current tax-free allowance of £12,300 |
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Inheritance Tax:
Extending the freeze:
“Just 1 in 25 deaths led to inheritance tax being paid last year, but despite that it holds the trophy as the UK’s most hated tax. The move to extend the freeze on allowances from 2026 to 2028 will mean that the £325,000 tax-free allowance will be unchanged for almost two decades, during a period where house prices and other asset prices have risen dramatically. It will take inheritance tax more mainstream and hit those who wouldn’t class themselves as wealthy.
“We already saw the nation pay £6.1bn of inheritance tax last year, £700m more than the previous year. The average UK house price is now £295,000, which means someone with a slightly-above average house will hit the inheritance tax allowance before they have any other assets. For some, the fiendishly complicated residence nil rate band will give a further boost and keep the taxman away from their estate, but for many it’s not workable.”
