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Autumn statement: Jeremy Hunt targets investors in dividend raid

Autumn statement Britain's Chancellor Jeremy Hunt leaves 11 Downing Street to attend Parliament in London, Thursday, Nov. 17, 2022. Just three weeks after taking office, British Prime Minister Rishi Sunak faces the challenge of balancing the nation's budget while helping millions of people slammed by a cost-of-living crisis. Treasury chief Jeremy Hunt will deliver the government's plan for tackling a sputtering economy in a speech to the House of Commons on Thursday. (AP Photo/Alastair Grant)
Autumn statement: Hunt slashes dividend allowance in raid on shareholders. Photo: Alastair Grant/Reuters

Investors have been hit by the Autumn statement as chancellor Jeremy Hunt announced a tax raid on their dividends and profits from shares, funds and investment trusts.

The dividend allowance will be cut from £2,000 to £1,000 next year. From April 2024, it will then be reduced to £500.

The annual exemption amount for capital gains tax will also change, dropping from £12,300 to £6,000 from April 2023.

It will then drop to £3,000 from April 2024.

“For a basic rate taxpayer, the reduction in the dividend allowance to £1,000 will mean they will end up paying £87.50 more in tax,” Shaun Moore, financial planning expert at Quilter.

“Similarly, if you are a higher rate taxpayer this rises to £337.50 more in tax and £393.50 if you are an additional rate taxpayer. From April 2024, a basic rate taxpayer will pay £123.75 more, increasing to £506.25 and £590.25 for a higher rate and additional rate taxpayer respectively.”

Figures from Canada Life show that if an investor has investments of £66,000 or less outside of an ISA, yielding 3%, the current £2,000 allowance covers this.

But the reductions in April 2023 and April 2024 mean the value would be halved to £33,000 and then £16,5000.

Read more: From income tax to pensions: What Jeremy Hunt's Autumn statement means for you

“This is bad news for the average investor holding money in unwrapped portfolios outside ISAs and pensions. There could be an opportunity here for these investors, to take gains in these portfolios and invest into ISAs and pensions but where these contributions have already been maximised, investment bonds provide a real investment opportunity without limiting the investment options,” Canada Life technical director Andrew Tully said.

“Using an investment bond wrapper could enhance tax efficiency of the money as it is a non-income producing asset, as also announced was the reduction in the capital gains tax exemptions from tax year 23/24 from its current £12,300 to £6,000 in tax year 23/24 and then further to £3,000 in 24/25 for individuals.”

The measures are being put in place by the chancellor in an attempt to fill a hole in public finances, due to his own rules on fiscal spending.

The move will be a blow to investors who hold assets outside of ISAs and pensions, where dividends are tax-free, particularly pensioners who rely on dividend income to top up their retirement income.

“Dividends are a popular way of creating a regular income from investments and therefore reducing the allowance will mean those who rely on dividends for the bulk, or all of their regular income will see this taxed at a much higher level when held outside of a ‘tax wrapper’ such as an Isa or pension,” said Moore.

“To avoid paying more tax than is necessary on dividends, you should ensure you are making use of all available tax shelters, such as the generous £20,000 Isa allowance. Furthermore, if you are a higher rate taxpayer, it may make sense to plan as a family and transfer shares to another family member who is in a lower tax bracket. You can also make use of children’s Jisa allowance which is set at £9,000 annually.”

The announcement will also hit landlords, second home owners and those looking to sell their property as capital gains tax (CGT) is applied at a much higher rate for residential property sales.

Read more: Stamp duty cut will end in 2025 Jeremy Hunt reveals in Autumn statement

Quilter tax and financial planning expert Rachael Griffin provided an example of what this change could mean: “Take for example a second homeowner who bought their property five years ago for the average house price in 2017 of £227,000.

“They would have made a gain of £67,559 at today’s average house price of £294,559 and therefore next year when the allowance is cut to £6,000 would pay £17,236 in CGT and if they sold the year after would pay £18,076 when the allowance is £3,000 assuming they are higher rate taxpayers.”

The announcement comes as inflation hit 11.1% in October, a 41-month high, and the UK is in the middle of a cost of living crisis.

Watch: Chancellor admits the government made 'some mistakes' with mini-budget