Back in March, Chancellor Jeremy Hunt delivered the Spring Budget 2023 speech — and there were a couple of things that caught our attention at the time.
One of those things was the announcement that, from the 6th of April this year, the Capital Gains Tax allowance (which previously stood at £12,300 per year) would be reduced by more than half, bringing it down to £6,000.
For those that aren’t in the know, Capital Gains Tax is the tax you pay on investments that fall outside of your annual ISA allowance (but we’ll go into more detail on that below).
And it doesn’t stop there, either: in April 2024, the Capital Gains Tax allowance will be slashed in half again, to a yearly total of £3,000. It was also confirmed that the dividend allowance would be reduced this April, meaning you might have to pay even more tax than you did in previous years.
These sorts of taxes are faced by a number of investors, which is why we want to ensure that our customers are kept in the loop with what they mean, and how these changes could impact them (or are already impacting them) going forward.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax you must pay on any money you make when selling an asset that has increased in value (like a stock or a share). For example, if you buy an investment for £1,000 and sell it for £20,000, you would be making a profit of £19,000.
One thing to bear in mind is that this tax is only applicable to investments made outside of your ISA allowance. This sits at £20,000 for the current tax year (as it didn't change from 2022/23), and means you could save and/or invest up to this amount in an ISA, without paying tax on any gains your money makes.
How much is Capital Gains Tax?
Previously, you’d only need to pay Capital Gains Tax on £6,700 of your £19,000 profit, because the first £12,300 would be tax free. But from 6th April 2023, this change in allowance means that the amount you'll need to pay tax on has increased to £13,000.
In the previous tax year (2022/23), a basic rate taxpayer would owe 10% on the profits from their investments. So, for the above example, you’d need to pay £670 (provided that your income doesn’t increase enough to push you into a higher tax band).
If you were a higher rate taxpayer, you’d owe 20%, making the amount payable £1,340.
For the 2023/24 tax year – based on the same profit of £19,000 – a basic taxpayer would be looking at paying £1,340 in tax, while a higher rate taxpayer would owe £2,600.
As you can see, this change could have a big impact on your profits if you max out your ISA allowance and carry on investing outside of it.
What is the Dividend Allowance?
Everyone in the UK has a Dividend Allowance, and this was previously set at £2,000 for the 2022/23 tax year.
How does this work? Well, let’s say you received £3,000 in dividends; you wouldn’t need to pay tax on the first £2,000, but you would need to pay tax on the other £1,000 because this would be over your dividend allowance.
On 6th April 2023, however, the dividend allowance was reduced to £1,000. You can see the potential impact of this change the table below:
Again, any investments within your annual ISA allowance won’t be subject to dividend tax; if you haven’t maxed this out yet (and have no intention of doing so), then this won’t impact you.
What’s the key takeaway from this?
ISAs (or ‘Individual Savings Accounts’) are gifts from the UK Government that allow you to give your money an opportunity to grow without needing to pay tax on your gains — and that could be in the form of interest on your savings or returns on your investments!
The ISA allowance will be remaining at £20,000 for the foreseeable future. And you could invest this entire amount through a Stocks and Shares ISA, or you could put some of it in that and the rest in a different type (like a Cash ISA).
So, with the recent changes in Capital Gains Tax and the Dividend Allowance, you probably want to ensure you’re making the most of your ISA allowance and not paying tax unnecessarily. After all, it’s there for you to use.
What else is changing?
On 6th April 2023, the annual pension allowance also increased to £60,000 from £40,000. This means you can now pay £60,000 into your pension each year before having to pay tax. However, this could be subject to change again in the future.
In addition to this, the Lifetime Allowance (the limit on how much you could pay into a pension over your lifetime whilst still enjoying the full tax benefits), was scrapped from 6th April 2023. Previously, the limit for most people was £1,073m.
These changes may or may not affect you. However, whatever your situation, it could be useful to ensure you understand these changes, so you can make the best, most informed decisions on how to manage and make your money work harder going forward.
Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.
With investing your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.