New general investment account tax rates set out in the Chancellors 2022 Autumn Statement are going to be damaging for your wealth.
Cuts to the dividend and Capital Gains Tax allowances will mean more of your investment returns will be lost if investing outside of an ISA and pension.
Understanding what tax allowances and investment options are available to you is essential to reduce the damage.
New general investment account tax rates
Against the backdrop of the previous Chancellor’s disastrous ‘Mini Budget’, the current Chancellor announced a series of tax changes during the 2022 Autumn Statement. The plan was to restore the UK’s financial creditability with the markets and to begin balancing the books.
The big changes for investors was firstly, a cut in the Dividend Allowance. Dividends are a share of the profits that are paid out by the underlying companies you invest in. Some investors like the dividend paid out to their bank account like income. Others like the dividend re-invested to buy more shares or units in a fund.
You are currently (2022/23 tax year) able to earn up to £2,000 per tax year in dividends without paying any Dividend Tax. Any dividends earned above this amount face Dividend Tax at a rate that will depend on what other earnings you have.
From tax year 2023/24 the dividend allowance will reduce to £1,000 and then from tax year 2024/25 will reduce further to £500.
Secondly, it was also announced that the Capital Gains Tax allowance will reduce. Currently, if you sell your investment or investments and total net gains are more than your annual Capital Gains Tax allowance of £12,300 then you will pay Capital Gains Tax.
From tax year 2023/24 the Capital Gains Tax allowance will reduce to £6,000 and then from tax year 2024/25 will reduce further to £3,000.
What’s worse is that you need to report investment sales that are 4 x the Capital Gains Tax allowance. Moving forward, you will only need to make £12,000 worth of sales to result in you having to report this to HMRC.
The general investment account tax changes will mean more people having to complete a tax return.
These changes will not impact investments inside an ISA or a pension but does mean significant money inside a general investment account should probably be avoided unless you have a plan.
How to avoid new general investment tax rates
Even a dividend rate of 1% of the value of your investment will mean a general investment account holding £50,000 will likely face Dividend Tax.
So what can you do to avoid these new general investment account tax rates.
Transfer money between spouses and civil partners
Money can be transferred between spouses and civil partners tax free. Therefore if you have a general investment account only in your name, consider making this a joint account with your partner. This will mean you then have two dividend and Capital Gains Tax allowances to use.
Use your ISA and pension allowances
If you don’t already make sure you move money from your general investment account into your stocks and shares ISA every tax year. If you are married or in a civil partnership then you could both do this giving you an extra ISA allowance.
Be careful to monitor your gains inside the general investment account though. Once the Capital Gains Tax allowance drops to £3,000 it will only take around 18% growth for a £20,000 ISA contribution to breach the allowance.
If you have retired and no longer working then you could still contribute up to £2,880 into a personal pension. You will receive tax relief up to £720 added on top every year until age 75. This could be funded by your general investment account.
Income or growth investments
Depending on your scenario is it better for you to invest into income producing investments or growth stocks?
There are companies and investment funds out there that aim to provide higher dividends rather than growth in the share or unit price. This could be useful if you want to avoid Capital Gains Tax.
Alternatively growth stocks don’t tend to pay dividends and instead focus all their efforts in growing the share price which will suit investors who don’t want to pay dividend taxes. The dividend tax rate is higher for higher rate tax payers than the Capital Gains Tax rate.
Once you have exhausted all other allowances you may want to consider some alternative investment products like:
- Onshore and offshore investment bonds.
- Enterprise Investment Schemes.
- Venture Capital Trusts.
- Seed Enterprise Investment Schemes.
Some of the above will mean taking more risk with your underlying investments so it’s important you don’t just invest for the tax benefits.
At the end of the day it still might be better paying a bit more tax if your net return is still better than anything else.
If you feel you are already paying too much in taxes then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have saved millions of pounds of taxes for our clients over the years.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.