Capital gains tax, dividend tax and income tax are all getting more punitive (Image: Getty)
Former Tory chancellor Jeremy Hunt froze income tax and national insurance thresholds all the way to 2028, slashed the capital gains tax (CGT) annual exempt amount to just £3,000, and cut the dividend allowance to a mere £500. Here’s how this could affect you.
Capital gains tax is charged on the profit from selling assets such as shares held outside of a tax-free Isa, Bitcoin, antiques, jewellery, second homes and investment properties.
In her Budget, Reeves lifted the CGT charge to a flat rate of 18% for basic rate taxpayers and 24% for higher rate taxpayers, regardless of the asset sold.
Myron Jobson, senior personal finance analyst at Interactive Investor, said gains on shares held outside the tax-free ISA wrapper are now subject to harsher tax.
“On a £10,000 investment gain, this translates to an additional £860 for a basic-rate taxpayer and £880 for a higher-rate taxpayer.”
Hunt’s move to slash the dividend allowance to just £500, which is the amount of income investors can take from non-ISA shares each year, wreaks further havoc.
Jobson said: “The additional tax burden on dividends totalling £2,000 is £43 for basic-rate taxpayers and £168 for higher-rate taxpayers.”
The CGT and dividend tax charge is based on how much you earn. In a double whammy, if your capital gains and dividends push you into a higher tax bracket, you’ll pay CGT and dividend tax at higher rates.
In practice it’s a triple whammy. “The freeze on the personal allowance at £12,570 until April 2028 means more of us will pay higher rates of income tax and NI,” Jobson said.
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As wages rise millions of taxpayers will be pushed into higher tax bands and hand over a higher percentage of their income.
This phenomenon, known as fiscal drag, is yet another stealth tax. It will continue right through to the 2028/29 tax year, when Reeves has pledged to end the freeze.
Jobson said the burden is particularly harsh for those earning between £100,000 and £125,140. At this level, the personal allowance is steadily removed, which effectively lifts 40% higher rate tax to 60%.
“Navigating the tax landscape can feel like a minefield but there are ways to fight back. Here are some of your options.”
Marriage Allowance. If married or in a civil partnership, and one of you is a basic rate tax payer while the other pays no tax, you can transfer up to £1,260 of unused personal allowance to your partner. This saves up to £252 annually and you may backdate claims up to four years if eligible.
Salary Sacrifice. Employees can reduce their income tax and NI bill by paying salary into a workplace pension via salary sacrifice. This works well if you’ve just been pushed into a higher tax bracket but Jobson warned: “It may impact entitlements like maternity pay or applications.”
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Pension contributions. You can claim income tax relief on contributions into a self-invested personal pension (Sipp). You can pay in up to £60,000 a year under the annual allowance, and claim tax relief at 20%, 40% or 45%, depending on your tax bracket.
Warning: if you’ve started making pension withdrawals, that £60,000 limit shrinks to £10,000 under the money purchase annual allowance (MPAA).
Bed & Isa. If you hold investments outside of an Isa, it’s possible to transfer them inside the tax wrapper, making all future capital gains and dividends tax-free, Jobson said. “This involves selling and re-buying shares, which may trigger a CGT charge, but thereafter brings long-term tax advantages.”
Spread gains across tax years. To minimise CGT when selling shares, split sales across different tax years to maximise your £3,000 annual exempt amount.
Use losses to offset gains. Losses on investments can offset taxable capital gains, reducing your overall tax liability.
Transfer assets to a spouse. Spouses or civil partners can transfer assets between each other free of tax, potentially allowing them to double their CGT and dividend tax allowances, Jobson said. “This is beneficial if one partner is in a lower tax bracket.”
Tax bills can be complex, so read up upon them carefully, and consider taking financial advice. The potential savings can make it a price worth paying.