What’s next for income and capital gains tax?

The budget came and went and, pretty much as expected (given the important tax and national insurance announcements in March and September), nothing more important to financial planners was announced.

Thus, in the spirit of doing the basics well in a context of apparent stability in relation to income tax and even capital gains tax, what are the key messages on the “fundamentals of tax planning” for investors?

Well, the personal allowance was frozen at £ 12,570 in the March 2021 budget and will remain at that level until the end of fiscal year 2025/26. Had he received the normal inflationary increase, the allowance for 2022/23 would have increased to £ 12,960. Few people know it! However, many people do not make full use of their personal allowance and in 2022/23 there will be a gap of almost £ 2,700 between the allowance and the starting point for NICs (£ 9,880 in 2022/23 ).

At the other end of the income scale, some taxpayers will have no personal allowance in 2022/23 (or future tax years until 2025/26) because their income exceeds £ 125,140, ​​to which the tapering off, which starts at £ 100,000, reduces their allowance to zero.

Advisors should remind their clients that there are several ways to ensure that they are maximizing the use of their allowances:

• Choose the right investments: Some investments do not allow you to recover the tax paid while others are designed to generate capital gain, not income.

• Couples should consider rebalancing their investments so that each has enough income to cover their personal allowances.

• Make sure that each couple has sufficient retirement income when they retire. State pension alone is not enough, whether it is the new state pension (up to £ 185.15 per week in 2022/2023, based on inflation data from September) or the old state pension of £ 141.85 per week (if you reached your statutory retirement age before 6 April 2016 and also based on September data).

• If one of the couples does not pay tax beyond the base rate and the other is a non-taxpayer, check whether it is worth applying for the transferable marriage allowance (£ 1,260 in 2021/22 and 2022/23).

To some it may seem like sweat, but all the small marginal gains that can be achieved by deploying a “personal allowance use maximization” strategy can add up.

It is the same with the personal savings allowance. As a reminder, here’s how it works:

• basic rate taxpayer, the first £ 1,000 of savings income is not taxed;

• higher rate taxpayer, the first £ 500 of savings income is not taxed;

• taxpayer at additional rate, you do not receive any personal savings allowance.

“Savings income” in this case is primarily interest, but also includes gains made on investment bonds, including offshore bonds. Although it’s called an allowance, the reality is that the personal savings allowance is a zero-rate tax bracket, so it is not as generous as it looks.

The Personal Savings Allowance means that UK based banks, building societies, NS&I and fixed interest collective funds all pay interest without tax deduction, but report the payments to HMRC. So if your interest income exceeds your personal savings allowance – which requires substantial capital at current interest rates – you could have taxes payable. Be warned that if you don’t tell HMRC it will have the data to tell you.

If each member of a couple earns substantial interest income, it should be verified that you both maximize the benefit of the Personal Savings Allowance. However, given today’s ultra-low interest rates, you might also want to consider whether you could earn higher income by choosing no deposit investments.

The dividend allowance, frozen at £ 2,000, means that in 2022/23 the first £ 2,000 of dividends you receive are tax-free, regardless of your marginal income tax rate. Once the £ 2,000 allowance is exceeded, there is a tax burden, the rate of which will increase by 1.25% for 2022/23. Like the personal savings deduction, the dividend deduction is actually a zero rate bracket, so up to £ 2,000 of dividends don’t disappear from your tax calculations, even though they are taxed at 0%.

Dividend tax rate

The pandemic has prompted a wide range of companies to reduce or stop paying dividends in 2020. Many companies have since reinstated their dividend payouts, although some have taken the opportunity to “rebase” their payouts. The current historical yield for UK stocks is now around 3.2%. Which means, in theory, that a portfolio of UK stocks worth more than around £ 65,000 could attract additional tax on dividend income, even for a base rate taxpayer.

For 2022/23, consider who should own what in terms of investments and savings. Savings and dividend allowances mean it’s not just about putting as much weight on the lowest taxpayer in a couple as possible. In theory, anyone will be able to earn up to £ 20,570 tax-free in 2022/2023, but only if they have the right mix of income, savings income and dividends.

Capital gains was a tax that caught the Chancellor’s attention last year when he asked the Office of Tax Simplification (OTS) to review how the tax works. The first OTS report was released in November, but the Chancellor made no mention of it in his March 2021 budget, deciding only to freeze the annual exempt amount at £ 12,300 until the end of the fiscal year 2025/26. A second report emerged from the OTS in May, dealing with technical issues. However, the Chancellor chose not to announce any significant changes to the capital gains tax, suggesting that reform may no longer be on the agenda.

A small practical capital gains tax change that was announced was doubling the reporting and payment period for capital gains tax on residential properties to 60 days. It takes effect immediately.

Tony Wickenden is Co-Managing Director of Technical Connection (a St James’s Place Wealth Management group company).