The clock is ticking for investors to make use of the £20,000 tax-free ISA allowance before they lose it at the start of the new tax year – or as much of it as they can reasonably manage.
With the tax-free dividend tax and capital gains tax (CGT) allowances set to be slashed from April, those with assets held outside their ISA wrapper face a higher tax bill to cash in on their investments.
Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “We’re facing the highest overall tax burden in a generation thanks to the deep freeze of tax thresholds and allowances which, in tandem with wage inflation, means we’ll be more in tax in the years to come. The upcoming cut in annual tax-free allowance for capital gains and dividend taxes will add insult to injury for investors with cash held outside ISAs and pensions tax wrappers.
“The changes impact those who have maximised their tax-free ISA and pension allowances, but also less affluent investors who have not had the time or the know-how to explore tax efficient options.
The dividend tax annual allowance is set to be reduced from £2,000 to £1,000 from April and again to £500 from April 2024. Meanwhile, the CGT tax annual exemption is more than halving, going from £12,300 to £6,000 in April 2023 and £3,000 from April 2024.
New calculations by interactive investor show a higher rate taxpayer earning £2,000 dividend income per year will be liable to pay dividend tax of £338 from 6 April 2023, rising to £506 from April 2024 when the dividend allowance is cut again. A basic rate taxpayer would face a tax bill of £88 from the new tax year and £131 from April 2024. Those scenarios are based on a £50,000 portfolio yielding 4% (shares in the FTSE 100 pay an average of around 4% dividend income).
A higher rate taxpayer earning £5,000 in dividend per year would owe £1,013 in tax at present, rising to £1,350 from April and then £1,519 from April 2024. For basic rate taxpayers, the amount owed in tax will increase from £263 to £350 in April and £394 from April 2024. Those scenarios are based on a £125,000 portfolio yielding 4%.
When it comes to CGT, the fall in tax-free allowance means a higher rate taxpayer making a gain of £10,000 will be required to pay tax to the tune of £800 CGT after April, or £1,400 if they sell their shares after April 2024. For a basic rate taxpayer, the figures are £400 from April and £700 from April 2024.
A higher rate taxpayer making a gain of £20,000 would owe £1,540 in tax at present, rising to £2,800 from April and then £3,400 from April 2024. For basic rate taxpayers, the amount owed in tax will increase from £770 to £1,40