The recent Autumn Statement delivered by Chancellor Jeremy Hunt was focussed on “rebuilding our economy”, tackling the UK’s growing national debt and creating stability. To do so, the Chancellor announced a number of tax threshold reductions, allowance freezes and some significant U-turns on many of the announcements made in the former Chancellor’s September mini-Budget.
For investors, the numerous changes to taxation revealed in the Statement are likely to be the most consequential. If measures are not taken to mitigate the impact of these changes, they could result in significantly heightened income tax and capital gains tax bills in particular.
The three key tax changes investors should be aware of are as follows:
1. The additional-rate income tax threshold is to be reduced from £150,000 to £125,140
The Chancellor made it clear in the Statement that he would be asking “those with more to contribute more”, and so began by announcing that from 6th April 2023, the level of income on which the additional-rate of tax will be charged will fall from £150,000 to £125,140.
This will mean an extra 250,000 people in the UK will pay the top rate, with those already earning £150,000 or above per year paying an additional £1,200 in tax annually.
2. The capital gains tax (CGT)-free allowance is to be reduced from £12,300 to £3,000
The CGT-free allowance is to make two large falls over the next two years, halving from its current level of £12,300 to £6,000 on 6th April 2023, before halving once more to £3,000 in April 2024.
With the £3,000 figure its lowest since 1981, this will have a notable effect on many investors holding CGT-liable assets should their value rise – which for the likes of property, it’s expected it will – unless a focus is shifted to tax-efficiency.
3. The dividends tax allowance is to be reduced from £2,000 to £500
At 8.75%, 33.75% and 39.35% for basic-rate, higher-rate and additional-rate taxpayers respectively, the rates of dividends tax are set to remain unchanged. However, the amount you are able to take tax-free as a dividend will fall substantially.
The tax-free dividend allowance was £5,000 in 2017/18, but for 2022/23 stands at just £2,000. In the Statement, the Chancellor announced this will halve to £1,000 in April 2023, and halve again to £500 in April 2024.
This represents a 90% reduction in the allowance over a six-year time span, one of the most drastic of any tax in that same period.
Mitigating the impacts of tax changes with an ISA
These tax threshold changes revealed in the Autumn Statement will result in hundreds of thousands of people paying considerably more tax. As an example, the Institute of Fiscal Studies report that circa three million people are expected to pay a higher rate of income tax alone by 2026.
What’s more, for investors already facing a turbulent investment landscape, a reduction in both the CGT and dividends tax-free allowances will be an unwelcome hit to their efforts to grow their hard earned capital.
This is where the potential of tax incentives – such as the tax-free ISA – becomes all the more apparent.
Investing in a tax-efficient manner has always been an important consideration for maximising returns, but since the Coronavirus pandemic and other macroeconomic pressures took hold and changed the economic backdrop – and now with these significant tax changes – it’s crucial.
Introduced in 1999 and remaining one of the most generous tax incentives available to investors in the UK, the ISA and current £20,000 annual ISA allowance allow investors to invest up to £20,000 each year into ISA-eligible assets and subsequently pay absolutely no income, capital gains or dividends tax on investments held.
As a result, the aforementioned tax threshold reductions have no bearing on the investments or savings held within the tax wrapper, whether that be property bonds held in an Innovative Finance ISA (IFISA), shares held in a Stocks and Shares ISA or cash held in a Cash ISA.
Taking the property-backed IFISA as an example, which often targets a return of 7% and over, to achieve this rate outside of the IFISA’s tax-free wrapper would equate to a Gross Equivalent Return of 12% for additional-rate taxpayers – whom hundreds of thousands more people are set to become.
The importance of tax-efficient investing
Clearly, investing tax-efficiently should now more than ever be a priority for investors. And the widening scope of the ISA market – which now includes increasingly popular alternative assets as well as traditional investment options – has resulted in more and more opportunities for experienced investors to build an all-important balanced, diversified and tax-efficient portfolio.