Outrage over the Autumn Statement may have faded amidst a festive blizzard of turkey, presents and general over-indulgence.
Nevertheless, reality dawns, for Chancellor Jeremy Hunt’s tax raid on investors’ dividends and profits from shares, funds and investment trusts is set to strike.
However, all is not lost – there are other tax-efficient investment vehicles you can use, such as ISAs, investments bonds, and venture capital trusts (VCTs).
A reminder first … the current £2,000 tax-free allowance for dividend income – £5,000 when introduced in 2016 – will fall to £1,000 in April and then to just £500 from April 2024. Meanwhile, the capital gains tax-free allowance will be hacked from £12,300 to £6,000 and then to £3,000.
SME owners receiving dividend payments – a common method by which they pay themselves rather than take a salary – have already faced a steady hike in their tax bill as dividend tax rates have been increased, with Mr Hunt piling on the pain by reinstating the 1.25 per cent extra announced in April 2022 but scrapped by Kwasi Kwarteng in his mini-Budget.
Equally, pensioners who rely on dividend income to supplement their retirement will wince.
According to figures released to This Is Money by Canada Life, if an individual has investments of £66,000 or less outside of an ISA, yielding three per cent, the current £2,000 allowance covers this. Unfortunately, the reductions this April and next mean the value will be halved to £33,000 and then £16,500.
Little time left then to utilise CGT exemptions for this tax year including that for spouses, thereby effectively doubling up, the message being to get your skates on.
Putting money into ISAs and pensions is one option – £20,000 a year maximum into the former while, for the latter, the annual allowance limit is £40,000, though this takes in your payments, tax relief, and employer contributions across all your pension arrangements.
Where already maximised, investment bonds are an alternative.
These are single-premium life assurance policies – insurance wrappers that can be used as investment vehicles. Providers may offer a variety of fund choices. Some focus on capital growth, some on income and some on growth and income.
You can choose between onshore and offshore.
With onshore, any gains within the investment bond are subject to income tax, not capital gains tax, and treated as tax-deferred whilst still invested. You can withdraw up to five per cent per year without incurring additional taxes. In the case of offshore, havens such as the Isle of Man, Luxembourg or the Channel Islands, investors may not have to pay UK income or capital gains tax on the underlying investment while the plan is in force, including dividends. However, you may not be able to reclaim any tax credits.
All quite complex, so weigh the benefits and restrictions very carefully.
As is the case too for Venture Capital Trusts.
The Government offers generous tax benefits for VCT investing, typically small or early-phase businesses that are either unquoted or on AIM, the London Stock Exchange’s market for growth companies. These businesses can potentially give you a high return, but they can also be much riskier than larger, more established companies.
You get a 30 per cent income tax credit on investments of up to £200,000 each year when you buy shares in a new VCT share offer – but you need to have paid at least as much tax as the rebate and must hold the shares for five years or more. There is no income tax to pay on dividends from VCT shares. And there is no CGT.
As ever, best to check first with your financial adviser.