In recent years, the United Kingdom has seen significant changes to the taxation of capital gains and dividends, impacting individuals, personal representative and trustees.
These changes have been introduced as part of the government’s efforts to raise revenue in the wake of Covid-19 and other economic pressures.
In this article, we will take a look at the upcoming changes to Capital Gains Tax and the dividend allowance, dividend tax rates in England and Wales. These changes will impact a wide range of taxpayers and bring some into needing to report to HM Revenue and Customs and pay tax on some assets/income for the first time.
It is important to take advice based on your own personal circumstances if you are unsure, due to the complexity of the rules.
Capital Gains Tax
Capital Gains Tax (“CGT”) is a tax on the profit made when you sell or dispose of an asset, such as property or shares. The amount of CGT you pay is based on the difference between the sale price/market value and the original purchase price, also taking into account costs of sale and purchase, known as the gain.
From this gain it may be possible to deduct an annual exemption for CGT purposes. In the 2022/23 tax year this exemption is £12,300 for individuals and some personal representatives. It is £6,150 for trustees.
However, from 6 April 2023 this exemption is reducing to £6,000 (£3,000 for trustees) and from 6 April 2024 it is reducing further to £3,000 (£1,500 for trustees). This is a significant reduction which will bring a large number of taxpayers into the CGT net and reporting requirement.
There is some good news in that the threshold for reporting a disposal is being set at £50,000 in respect of the proceeds received. This means that if the proceeds from a disposal are less than £50,000 and the gain is below the annual exemption for the tax year of the disposal it does not need to be reported to HM Revenue and Customs (“HMRC”).
If, however, the proceeds are above £50,000 the disposal needs to be reported to HMRC regardless of whether there is any CGT to pay. If the gain is above the annual exemption and there is CGT to pay it needs reporting to HMRC regardless of the level of proceeds.
The gain can be reported to HMRC via a Self Assessment Tax Return or via HMRC’s Real Time CGT reporting service if you have no other reason to complete a Tax Return. If the disposal is a residential property the gain, and CGT payable, needs to be reported and paid to HMRC within 60 days of the date of completion via a CGT Return. If the individual is non-UK resident this is extended to non-residential property as well as residential and needs to be reported regardless of whether there is CGT to pay or not.
The current rates of CGT depend on whether the asset being sold is residential property or not and also the individual’s level of income for the tax year of the disposal.
The current rates of CGT are 10% for basic rate taxpayers and 20% for higher/additional rate taxpayers. These rates increase to 18% and 28% when the disposal involves a residential property. If the gain when added to the individual’s income for the year takes that total amount over the higher rate threshold then the gain will be taxed at a combination of 18% and 28% for residential property and 10% and 20% for all other assets.
The rates for personal representatives and trustees are set at the higher levels of 20% and 28% depending on the asset sold and are not affected by the level of income for the tax year of disposal.
The dividend allowance refers to the amount that an individual can receive tax-free each year from dividend income. This is in addition to the Personal Allowance which for the 2022/23 tax year is £12,570 to UK resident individuals. You do not pay tax on any dividend income that falls within your Personal Allowance but if your other income exceeds the Personal Allowance, the dividend allowance can be utilised.
Dividends are payments made by companies to their shareholders, usually as a share of the company’s profits. These can be from big public companies or from smaller and sometimes family-owned limited companies.
The dividend allowance in the 2022/23 tax year amounts to £2,000. This means that any dividends received below this amount are tax free.
However, in the 2022 budget, the Chancellor announced that this allowance would be reducing, firstly, to £1,000 from 6 April 2023 and then to just £500 from 6 April 2024.
As a result of these changes, a large number of individuals who invest in shares outside of Individual Savings Accounts (“ISAs”) and those with shares in limited companies and receive dividends will be required to pay tax on income above these allowance levels.
The reporting process for this income will depend on the level of dividend income received, and whether the individual already completes a Self Assessment Tax Return or not. If the individual does complete a Self Assessment Tax Return then the tax due on the dividend income will be worked out as part of the tax return process and the new dividend allowances will be taken into account.
If the individual does not already complete a Self Assessment Tax Return then the following applies:
Dividend income up to £10,000
The individual can contact HMRC by telephone and ask that their tax code is updated to reflect the amount of tax due on the dividend income. This tax can then be taken from that individual’s wages or pension income.
If the individual does not have wages or pension income that utilise a tax code then the individual will have to register to complete a Self Assessment Tax Return but if they are self employed or receive rental income for example they should already be completing a Tax Return and report the dividends as part of that.
You do not need to tell HMRC if your dividends are within the dividend allowance for the tax year. However, care should be taken when your total income is around the £50,000 or £100,000 mark as the dividend income received could affect your child benefit or Personal Allowance entitlements.
Dividend income over £10,000
The individual will need to register with HMRC to complete a Self Assessment Tax Return.
If they do not usually send a tax return, they need to register with HMRC by 5 October following the tax year they had the income, otherwise HMRC can charge a late registration fee.
Dividend tax rates
The rate at which tax will be paid on dividend income will depend on whether the dividend income falls within the basic, higher or additional rate tax band for the individual concerned. The rates are:
|Tax band||Tax rate on dividends over the dividend allowance|
Dividend income for personal representatives is taxed at the basic rate, whereas for trustees it is taxed at the additional rate. Neither are entitled to the dividend allowance but trustees may be able to have the first £1,000 of income taxed at the basic rate.
How we can help
If you need assistance with understanding whether you have a reporting requirement and with completing a Self Assessment Tax Return or notifying HMRC of a tax liability, or if you have tax to pay on any Capital Gains or dividend income, or any other sources of income, then please do get in touch and we would be happy to help and advise further.