Key role of ISAs as other tax allowances fall
- Shunil Roy-Chaudhuri, Personal Finance and Investment Writer
- 23 October 2023
- 5 mins reading time
In April 2023 two significant changes were made to individual tax allowances. Cuts to both capital gains tax (CGT) and dividend tax allowances were announced in the 2023 Budget, with further cuts to take place in subsequent years.
This means that, without keen tax planning strategies, the potential for capital growth and income on future savings may be reduced.
New tax regime
In summary, this tax year the CGT allowance was reduced from £12,300 to £6,000 for individuals. This will be further reduced to £3,000 in the 2024/25 tax year. The CGT allowance for trusts has also been cut. Most trustees now have an allowance of £3,000 for 2023/24 and this will fall to £1,500 in the following tax year.
At the same time, the dividend allowance for individuals was cut from £2,000 to £1,000 for 2023/24. This will be halved again in the next tax year, when individuals will only be able to receive £500 of dividend income before it becomes taxed.
Up to now, neither tax has resulted in significant revenues but, given recent economic struggles in the UK, there is a greater motivation by the state to increase tax receipts across the board. With these changes, the Office for Budget Responsibility (OBR) estimates the cut in CGT allowance will generate more than £25 million in its first year. Then, in 2024/25, this is forecast to accelerate to more than £275 million (1). The dividend allowance cut is also estimated to generate significantly greater revenue, with an extra £450 million in 2024/25 and nearly £1 billion by 2027/28 (2).
Unfortunately, both CGT and dividend tax can take significant bites out of your capital growth and income.
CGT rates on residential property sales are currently set at either 18 percent or 28 percent for basic and higher/additional rate taxpayers, respectively. For other investment assets, rates are set at 10 percent or 20 percent. The sale of an individual’s main residence is exempt from CGT. Current dividend tax rates are set at 8.75 percent, 33.75 percent and 39.35 percent for basic, higher and additional rate taxpayers, respectively.
These tax rates can have serious consequences for those who are benefiting from a company’s dividend payments, proceeds from a property sale or from a successful investment.
Tax protection from ISAs
There is some positive news, however. Despite the recent changes to tax allowances, the tax benefits of ISAs (Individual Saving Accounts) have been left untouched. So dividend income and capital gains from investments held in ISAs remain exempt from dividend tax and CGT.
ISAs can help you invest tax-efficiently. They employ a simple structure that offers tax protection on the assets they hold and, as of 2023/24, the individual ISA allowance amounts to £20,000 a year. Against a backdrop of lower allowances, ISAs can play a key role in tax planning, helping you protect your wealth while preparing for the future.
Yet the appropriate use of ISAs depends on an individual’s unique requirements. Are you nearing retirement, or maybe you would like to bring this forward? If so, you may want to increase your tax-efficient savings. Do you have to plan for large expenses in the future, such as house moves, weddings or university fees? If so, then you may want to start saving now. And are you interested in finding out how an ISA can work with other tax-planning arrangements for the benefit of your own specific circumstances?
These are all considerations that could affect how you might want to use ISAs. It is also important to ensure you have enough time to make a decision about using an ISA and how it could benefit your financial situation. With the tax year starting in April, many savers start exploring their ISA options around late February, which starts what is often known as ‘ISA season’.
We believe any season is ISA season. We think it is important to speak with a qualified financial planner who can use their knowledge and experience to answer all your questions whenever you start to plan.
At Schroders Personal Wealth, one of our principles is to have regular reviews with a financial adviser. Speaking with a qualified financial planner could help you make the most of your ISA allowances and create the best strategy for long-term tax efficiency, growth and income.
(1) Gov.uk, Capital gains tax: annual exempt amount, 21 November 2022.
(2) Gov.uk, Income tax: reducing the dividend allowance, 21 November 2022.
This article is for information purposes only. It is not intended as investment advice.
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