In November, the chancellor, Jeremy Hunt, changed several tax allowances in his autumn statement.
Two vital changes that you should take note of before they come into effect are reductions to the Capital Gains Tax (CGT) annual exempt amount and the Dividend Allowance.
These allowances, which dictate how much you can earn on gains and from dividends before you start paying tax, are set to reduce in April 2023. Read on to discover how these allowances will change and how you can make the most of them before the start of the new tax year.
The chancellor changed the CGT annual exempt amount and the Dividend Allowance
On 17 November 2022, chancellor Jeremy Hunt delivered his autumn statement, unveiling a range of UK fiscal policy changes.
Two of the fundamental changes the chancellor announced that could affect your personal finances are the reduction of the CGT annual exempt amount, and the reduction in the Dividend Allowance from April 2023.
These reductions to tax allowances could negatively affect your “unearned income” – a source of income from anything that isn’t a pension, salary, or profits from running a business.
As you may already know, CGT is a tax paid on profits on the sale of assets. This includes:
- Possessions worth more than £6,000
- Vehicles excluding your main car
- Properties other than your primary residence
- Shares not in an ISA.
As of the 2022/23 tax year, the CGT annual exempt amount stands at £12,300. Thanks to this allowance, you can typically make gains up to £12,300 before you would be required to pay CGT.
While the former chancellor, Rishi Sunak, froze the CGT annual exempt amount at £12,300 until 2026, Jeremy Hunt announced this would reduce to £6,000 in April 2023, then further to £3,000 in April 2024.
Meanwhile, the Dividend Allowance, which is the amount you can earn from dividends before you are required to start paying tax on them, is set to reduce from £2,000 to £1,000 in April 2023, then again to £500 in April 2024.
The government forecasts that, in the 2023/24 tax year, around 500,000 individuals and trusts could be affected by the CGT annual exempt allowance decrease. They predict this number to climb to 570,000 by the 2024/25 tax year.
Similarly, the government says that the Dividend Allowance reduction will affect more than 3.2 million individuals in the 2023/24 tax year, which is expected to climb to more than 4.4 million in the 2024/25 tax year.
You can make the most of the CGT annual exempt amount by using CGT-exempt investing accounts
If you have investments or assets you’ve been planning to sell for some time, it may be worth doing so while the CGT annual exempt amount remains at £12,300. Crystallising gains up to this amount could mean you pay less CGT than you would if you waited until future tax years when the exempt amount is lower.
It’s worth noting that this is an individual exemption, so if you have a spouse or partner, you could combine them and make gains of up to £24,600 before the exempt amount falls.
It’s also worth noting that you can’t carry your CGT annual exempt amount forward to the next year, so if you don’t use the £12,300 exemption before April 2023, you will lose it.
Also, when the changes are made to the CGT annual exempt amount, you may want to consider using CGT-exempt assets, such as an ISA. All ISA profits are free of both Income Tax and CGT.
One solution could be to use a “Bed and ISA” strategy. Here, you would realise gains of up to £12,300 from the sale of shares or other assets from your tax-inefficient portfolio before April 2023, and then invest these funds into an ISA, thus protecting some of your money from future CGT charges.
Rethinking your investment strategy could help you make the most of the Dividend Allowance reduction
As for the Dividend Allowance, you may find that you’re especially affected by these changes if you run your own business or you own dividend-paying shares.
For example, you may use a combination of dividends and salaries when you draw profits. From April 2023, you’ll be able to draw a lower amount of dividends before you pay Dividend Tax, so you may need to revisit how you extract money from your business.
If you aren’t a business owner, but still rely on dividend payments in some way, you may also want to rethink your investment strategy in light of the lower Dividend Allowance.
Much like the CGT annual exempt amount, the Dividend Allowance can’t be carried forward to the next year, so you should consider making the most of it before the allowance drops in April 2023.
Get in touch
The CGT annual exempt amount and the Dividend Allowances were just two changes made in the autumn statement. If you would like to discuss how your finances could be affected by the changes, please email firstname.lastname@example.org or call us on 01189 876655.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.