Autumn statement & the impact on investments
The impact of the chancellor's budget on your dividends and capital gains
The economic forecast by the independent office of budget responsibility (OBR) that swept in alongside Chancellor Jeremy Hunt’s Autumn Statement was as grim as the recent spell of rain: we’re likely already in a recession; the slump will go on more than a year; the economy is in a worse state than the rest of the G7 economies. As a result, Mr Hunt inferred Christmas would not be coming early as he stepped up to the dispatch box and sketched out how he was going to fill a £55 billion fiscal hole in the public purse. He would need to raise taxes and slam on the austerity brakes. In spreading the pain widely, investors were included in the crosshairs, and in particular, their capital gains and dividends.
As an investment trust that aims to provide investors with both capital growth and equity income, on both fronts, its investors may need to pay more tax. Here, we take a look at what this may mean in pounds and pence.
Dividends
Currently, if you earn more than £2,000 in dividends outside of a tax-free wrapper such as an ISA or SIPP, you are required to pay dividend taxes, with the level depending on your tax band: 8.75% for basic rate taxpayers, 33.75% for higher rate payers, and 39.35% for additional rate payers. From next April, the tax-free threshold will drop to £1,000, and then to £500 from April 2024, likely increasing the dividend tax bill for many.
Below is the extra tax you may pay over the next two years:
Source: AJ Bell. Calculations assume annual dividends of £2,000 or more.
Capital Gains Tax (CGT)
As it stands today, CGT is paid on gains above £12,300, with basic rate payers paying 10%, and additional and higher rate payers 20% (rates are different for property – see below). It had already been frozen until 2026 under the previous chancellor Rishi Sunak - now prime minister -creating an effect called ‘fiscal drag' whereby over the years inflation or wage growth push increasing numbers of people into paying more tax. Mr Hunt has gone one step further: cutting the tax-free threshold to £6,000 from next April, and then again to £3,000 in April 2024.
Below outlines the impact for CGT:
Source: AJ Bell. Calculations assume annual capital gains of £12,300 or more.
Don't forget your allowances
Of course, investing in tax-free wrappers such as ISAs or SIPPs avoids all taxes on capital gains, dividends, or interest from bonds. If at all possible, make sure you are maximising the allowance of £20k per tax year for an ISA and £40k for a pension.
Marcus De Silva is a Freelance Investment Writer
This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of the Manager and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at November 2022 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. TWIM is the appointed Alternative Investment Fund Manager of Alliance Trust plc. Alliance Trust plc is a listed UK investment trust and is not authorised and regulated by the Financial Conduct Authority