• Labour and Lib Dem plans will see capital gains taxed as income – increasing the tax rate for the highest earners from 20% to 50% under Labour’s plans
• Income investors would also be hit with cuts to the dividend allowance and higher tax rates under Labour
• Over 10 years, a non-ISA investor with income of £80,000 could pay additional:
o Capital gains tax of £5,075 under Labour and £10,324 under the Lib Dems
o Dividend tax of £6,250 under Labour
Laura Suter, personal finance analyst at investment platform AJ Bell, comments:
“The proposals from Labour and the Liberal Democrats would cost investors by hiking tax rates to bring them in line with income tax for both capital gains and dividends in the case of Labour and on just capital gains under the Lib Dems. Currently investors have a £12,000 capital gains allowance and a £2,000 dividend allowance, but both parties are aiming to slash the capital gains allowance and Labour going a step further and also cutting the dividend allowance.”
Dividend tax changes
“Income investors who have considerable savings outside of an ISA or pension have already been clobbered in recent years by the Conservative government, which first jacked up the rates of tax on dividends and then slashed the annual dividend tax free allowance. This crackdown would be supercharged under Labour, effectively cutting the current dividend tax free allowance in half to just £1,000 and taxing them like income.
“In terms of the tax rates paid on dividends, basic-rate taxpayers will see a big rise from 7.5% to 20% under Labour. 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 32.5% current tax rate to 45%.
“Someone receiving £5,000 a year in dividends from their investments will see their tax bill rise by up to £8,570 under Labour over 10 years. A basic-rate taxpayer would pay an extra £575 a year, while a higher earner on £125,000 a year would pay £825 more in tax each year.”
Capital gains tax changes
“The move to scrap the capital gains tax 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. In particular higher-rate taxpayers will be hit as they’ll see their tax on gains go up from the current 20% to 40% under Labour and to 41% under the Liberal Democrats, while those earning £125,000+ will go from a 20% tax rate to 50% under Labour.
“Someone with £60,000 in their investment account (the average AJ Bell Youinvest general investment account size), 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 would have to stump up £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.
“However, 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.”
How the proposed tax changes would affect investors over 10 years
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Dividends of £5,000 a year |
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Someone with income of £49,000 |
Someone with income of £80,000 |
Someone with income of £125,000 |
Someone of income of £150,000 |
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|
|
Tax due |
Tax grab |
Tax due |
Tax grab |
Tax due |
Tax grab |
Tax due |
Tax grab |
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Current system |
£2,250 |
- |
£9,750 |
- |
£9,750 |
- |
£11,430 |
- |
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|
Under Labour plans |
£8,000 |
£5,750 |
£16,000 |
£6,250 |
£18,000 |
£8,250 |
£20,000 |
£8,570 |
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|
Source: AJ Bell, based on £5,000 of investment income a year. For all taxpayers it assumes the income doesn’t take you into the next income tax bracket. · Current system: Includes £2,000 dividend allowance each year, with basic-rate taxpayers paying 7.5%, higher-rate payers paying 32.5% and additional-rate payers paying 38.1%. · Labour plans: Assumes dividend allowance of £1,000, and tax rates of 20% for those earning up to £50,000, 40% for those earning £50,000 to £80,000, 45% for those earning £80,000 to £125,000, and 50% for those earning £125,000+. |
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Capital gains of 5% a year on £60,000 portfolio |
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Someone with income of £49,000 |
Someone with income of £80,000 |
Someone with income of £125,000 |
Someone with income of £150,000 |
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|
|
Tax due |
Tax grab |
Tax due |
Tax grab |
Tax due |
Tax grab |
Tax due |
Tax grab |
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|
Current system |
£2,573 |
- |
£5,147 |
- |
£5,147 |
- |
£5,147 |
- |
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|
Under Labour plans |
£5,111 |
£2,537 |
£10,221 |
£5,075 |
£11,499 |
£6,352 |
£12,777 |
£7,630 |
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|
Under Liberal Democrat plans |
£7,924 |
£5,351 |
£15,471 |
£10,324 |
£15,471 |
£10,324 |
£17,357 |
£12,210 |
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Source: AJ Bell. Assumes £60,000 initial investment, with 5% capital gains each year, with no capital losses to offset, and gains are sold after 10 years. Assumes the capital gain doesn’t take you into the next income tax bracket.
· Current system: Assumes £12,000 CGT allowance each year, with basic-rate taxpayers paying 10% on gains, and higher and additional-rate payers paying 20%. · Labour plans: Assumes higher of annual CGT allowance of £1,000 or rate of return allowance (which assumes 10-year bond yield is 2.03% - the 10 year average). Assumes tax rates of 20% for those earning up to £50,000, 40% for those earning £50,000 to £80,000, 45% for those earning £80,000 to £125,000, and 50% for those earning £125,000+. · Liberal Democrat plans: Assumes zero annual CGT allowance, and tax rates of 21% for those earning up to £50,000, 41% for those earning £50,000 to £150,000 and 46% for those earning £150,000+. |
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How the main parties’ policies will impact personal taxes
|
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Labour |
Liberal Democrats |
Conservative |
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Income tax |
Cut additional rate of tax threshold from £150,000 to £80,000. Introduce new 50% rate for those earning more than £125,000. |
1p increase in income tax ring-fenced for NHS and social care |
No increases in income tax or VAT |
|
National insurance |
|
|
Raise NI threshold to £9,500 in 2020/21 |
|
Capital gains tax |
Remove the capital gains tax allowance and tax gains as if they were income (subject to a minimum allowable gain equal to the return on 10 year bonds or £1,000) |
Remove the capital gains allowance and tax gains as if they were income. |
|
|
Dividend tax |
Cut dividend allowance to £1,000 and tax dividends as if they were income |
|
|
|
Inheritance tax |
Remove the residence nil rate band |
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