Budget 2023 – How will the changes to the tax system affect your investments?
Following Chancellor Jeremy Hunt's Spring Budget, Matt Ralph examines the effect it may have on the Capital Gains Tax and dividend allowances for thoughtful investors.
Budget 2023 – How will the changes to the tax system affect your investments?
It seems a long time since last Autumn when the seeds for the latest budget announcement were mooted. The now infamous ‘mini-budget’ quickly led to the downfall of first Chancellor Kwasi Kwarteng and then Prime Minister Liz Truss. In came Jeremy Hunt and Rishi Sunak, reversing almost all of the tax cuts and spending plans that had been set out.
This was followed by the Autumn statement which set out a variety of tax increases which have now been confirmed in the Spring Budget. This piece will focus on two allowances that have been reduced and we believe will be most pertinent to you in the context of your savings and investment portfolios: the capital gains tax allowance and the dividend allowance.
Capital gains tax
This is a tax payable when you sell an asset, such as a shareholding, for a profit. Everyone has an annual allowance (or exemption) and tax only becomes payable when the realised profit exceeds this amount. Unlike income tax which can often be recovered at source, for example through pay as you earn (PAYE), capital gains tax relies on each individual reporting and paying themselves. Usually this is done through self-assessment.
The budget announced that the allowance will be reduced by over half this year to £6,000 with a further reduction to £3,000 from April 2024.
Over recent years the allowance had been relatively consistent, so the changes announced seem significant, as noted below:
2014/15 |
2015/16 |
2016/17 |
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 |
2023/24 |
2024/25 |
£11,000 |
£11,100 |
£11,100 |
£11,300 |
£11,700 |
£12,000 |
£12,300 |
£12,300 |
£12,300 |
£6,000 |
£3,000 |
Source: Capital Gains Tax rates and allowances - GOV.UK (www.gov.uk)
Dividend tax
Dividends are paid from many shares and collective investments and taxed as income. The dividend allowance, in comparison to the capital gains tax allowance, is a relatively new concept, introduced in April 2016. Whatever an individual’s total income, no tax is due on dividend income up to the allowance. When first introduced, the allowance was £5,000, reducing to £2,000 in 2018 and remaining at that level until this year.
From April 2023 the dividend allowance will reduce to £1,000, with a further reduction to £500 scheduled from April 2024 as follows:
2016/17 |
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 |
2023/24 |
2024/25 |
£5,000 |
£5,000 |
£2,000 |
£2,000 |
£2,000 |
£2,000 |
£2,000 |
£1,000 |
£500 |
Source: Tax on dividends: How dividends are taxed - GOV.UK (www.gov.uk)
So what are the implications for investors?
The obvious answer is more tax will be due on investors when a profit is realised or dividends are paid from investments. However, there is slightly more to this, and a change in the relationship between investors and the tax system could emerge.
For example, a popular method of funding an ISA allowance is to first sell an asset or assets in a less tax efficient portfolio, with the sale proceeds then invested into an ISA. This could be the first time that many investors need to decide whether to create a liability to capital gains tax to fully fund their ISA allowance – which is currently £20,000 – using this method.
Another implication is that is that many investors may, for the first time, need to start completing tax returns to report capital gains and/or dividend income. This could be a surprise for many who have valued the simplicity of their investments.
Should the reduction in allowances constrain investment managers?
In short, we don’t think so.
It’s important to keep in mind a key question: ‘What is the aim of my portfolio?’. The objectives and risk profile you had in mind when investing, whether that be planning for retirement or simply building financial security, shouldn’t be discounted because of changes in the tax system.
A key element of discretionary management is allowing an investment manager to make changes quickly throughout the year as opportunities present themselves. This often involves selling an investment to realise a profit, which in turn may create a tax liability, the likelihood of which increases as tax-free allowances decrease. The effect of tax will be a serious consideration for our team, who will aim to keep any liability incurred proportionate to the resulting benefits to the wider portfolio. However, we don’t believe that it should overshadow the key aim of your portfolio, which is to meet your long-term objectives.
So although investors are likely to pay a bit more tax as a result of the changes, we believe that constraining the management of your portfolio is likely to be more costly over the longer term.
How can Castlefield help?
Firstly, we can provide you with all the information you or your accountant will need to help you complete your tax return where a tax liability arises within your portfolio.
Further to this, our advisers can help you to understand how the tax system interacts with you and your investments. We can help you to organise your assets in line with your objectives and values to meet your long-term goals, by using ‘tax wrappers’. This could be ISAs and pensions that are exempt from both capital gains tax and dividend tax – or investment bonds that can defer the tax that needs to be paid or reported until the end of the investment term.
Written by Matt Ralph
We do not receive any referral fees from accountants, or any other professional services provider.
Please note that this communication does not constitute taxation advice. Should you require taxation advice please speak to a taxation specialist or accountant. Any personal advice in respect of taxation is not regulated by the Financial Conduct Authority.
The taxation rates and allowances shown are believed to be accurate as at 16/03/2023. It is based on information obtained from sources which we believe to be accurate but the accuracy of which we cannot warrant and may be subject to change at short notice, therefore we cannot be held responsible for the implications of relying on this information.
Further information about taxation rates, allowances and protections are available at https://www.gov.uk.