Tax rises are coming – so fight back with these tips

Savers face an onslaught of tax rises next month, regardless of what Chancellor Jeremy Hunt announces in his Budget on Wednesday.

Speculation is mounting over whether he will cut National Insurance, income, inheritance or other taxes.

But savers are being warned to watch out for tax rises that have already been confirmed for the new tax year from April 6 – unless the Chancellor grants a last-minute stay of execution.

The annual capital gains tax exemption is set to halve from £6,000 to £3,000 from April. This will mean anyone who makes a profit when selling assets or investments that exceed this amount will face a tax bill.

As much as £11.4 billion was paid in capital gains tax in the year to January, and this sum is set to rise next year once the allowance is cut. As many as 260,000 more investors and trusts will pay it for the first time in 2024-25, according to figures from HMRC.

The allowance cut was announced as long ago as November 2022, in Hunt’s Autumn Statement that year. 

However, it only comes into force in April because it is one of two consecutive cuts he announced at the same time; the other was from £12,300 to £6,000 from April last year.

The annual dividend allowance will also be halved from April to £500. The cut will reduce the amount that you can earn in dividends without paying tax to just a tenth of what it was as recently as 2018. 

It was cut from £5,000 to £2,000 in 2018, and halved to £1,000 in 2023. Over 1.1 million more people will find themselves paying dividend tax as a result, HMRC estimates.

Jason Hollands, managing director of the online investment service Bestinvest, says: ‘The tax environment for savers and investors is set to become markedly tougher as policy stands.’ 

He adds that the slew of cuts to the capital gains exemption and dividend allowances leave the impression that the Government is ‘actually hostile to investors’.

To counter these cuts, savers and investors can make sure they are making good use of all the tax-free allowances that are available to them.

Individual Savings Accounts are invaluable for keeping investments tax free. That is because there is no capital gains or dividends tax to pay on any investments held in them.

Hollands suggests that investors who own shares or funds outside of an Isa or pension may want to consider selling them before the new tax year when their exemption is halved. 

Then they can repurchase these investments within an Isa – in a process known as Bed & Isa – to protect future gains from tax.

‘As the process can take a few days, this should not be left until the eleventh hour of the tax year,’ he says.

Investment platform AJ Bell estimates that a basic-rate taxpayer who made the most of their capital gains tax allowance each year for the next ten years and moved that money into an Isa could save £7,775 in tax compared to leaving those gains to build up in a non-Isa account and realising them all in one year.

A higher-rate taxpayer could save £15,550. This assumes allowances and rates remain unchanged, that assets grow by 5 per cent a year and that you transfer £20,000 into your Isa the first year, and £10,000 a year thereafter.

Married couples and those in civil partnerships can transfer investments between them without incurring a capital gains tax bill. 

That means that if your spouse has not used up their full Isa allowance, but you have, it may make sense to transfer investments to them to make the most of their tax break. 

Laura Suter, at AJ Bell, warns: ‘You just need to make sure you keep a note of the original cost of the asset, as that’s what will be used when your partner comes to sell it.’

If you make losses on your investments, these can be set against your capital gains, but they must be reported to HMRC.

If you do have to pay capital gains tax, you’ll pay 28 per cent on gains from residential property that is not your main home, and 20 per cent on gains from other assets.

For a basic-rate taxpayer, the amount you pay depends on the size of your gain, your overall income and whether the gain is from residential property or other assets. 

It’ll be 10 per cent on gains if it keeps you within the basic-rate for income tax, and 18 per cent on property, and rises to 20 per cent and 28 per cent for property on any amount above the basic tax rate.