Household budgets are set to be even more squeezed from April while rampant inflation and a host of new, higher tax burdens further erode the value of earnings. Capital gains tax and dividends tax allowances will be slashed in half as the new tax year starts next week, however, an expert has explained the ways people can protect their investments and keep more of their wealth.
Myron Jobson, senior personal finance analyst at interactive investor, said: “It is shaping up to be yet another awful April for personal finances, with price rises seemingly coming from all directions.
“This is compounded by stubbornly rampant inflation which unexpectedly ticked higher in February – propped up by price rises in essential areas of expenditure like food. Meanwhile, the deep freeze in the personal allowance and tax thresholds means we will all be paying more in tax overtime as earnings grow. It is a perfect storm that threatens to knock finely-tuned budgets off-kilter.”
However, he added: “There is no escape from rising prices, so tackle them head-on.”
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From April 6, the dividend allowance will be halved from £2,000 to £1,000, while the capital gains tax (CGT) annual exemption will be reduced from £12,300 to £6,000, and a further £3,000 from April 2024.
Mr Jobson said: “Our calculations show a higher rate taxpayer earning £2,000 dividend income per year will be liable to pay dividend tax of £338 from April 6, 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 four percent (shares in the FTSE 100 pay an average of around four percent dividend income).”
Based on a £125,000 portfolio yielding four percent, a higher rate taxpayer earning £5,000 in dividends 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.
Mr Jobson said: “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. Basic rate taxpayers could see tax payments rise from £770 to £1,400 in April and £1,700 from April 2024.
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However, the transfer will involve selling and buying back shares, which could trigger a CGT bill.
Mr Jobson said: “While ii charge commissions on the repurchase of investments into an ISA, and stamp duty may be applicable, Bed and ISA is a tried and tested route to wrapping existing investments to generate the long-term benefits of a tax-efficient ISA – which over the long term is likely to outweigh the charges that might apply.”
Bed and SIPP works in a similar way, letting people top up their pensions by using their existing investments as SIPP contributions. But, it should be noted that withdrawals that exceed the 25 percent tax-free allowance will be taxed as income.
