Jeremy Hunt’s attack on private investors – what to do now

Investors can cut their tax bill by taking advantage of the following schemes and savings pots. 

The government unleashed a wave of tax rises on private investors in its Autumn Statement.

Following Chancellor Jeremy Hunt’s reform on “unearned income”, the tax-free capital gains tax allowance will be reduced from £12,300 to £6,000 from April 2023 and then to £3,000 from April 2024.

Investors with capital gains over these thresholds pay 20%, or 10% if this amount is within the basic income tax band.

• Find out more: SIPPs explained | SIPP calculator | SIPP drawdown

Hunt also announces that the tax-free allowances on dividends would drop from £2,000 today to £1,000 next spring, and then to £500 from April 2024.

Dividend tax is charged at 8.75% for basic rate payers, 33.75% for higher rate payers and 39.35% for additional rate payers.

Private investors therefore could face greater tax bills if they do not take action before the new tax year.

The first point of action is to make the most of pensions and ISAs to minimise tax.

• Read our guide on capital gains tax
• Is the UK state pension really the worst in Europe?

ISAs allow investors to put up to £20,000 a year into tax-free account. Investments held inside an ISA or not subject to capital gains or income tax. Money going into an ISA has already been taxed via income tax and national insurance contributions.

ISAs with interactive investor start at £9.99 a month and do not levy any fees to hold investments, such as stocks, funds and investment trusts.

Up to £40,000 can be invested into a pension every year. Contributions get tax relief on the way in, either via self-assessment rebates or via employers, where contributions are made before taxes are applied.

There is also the “lifetime allowance”, where savings that breach the limit of £1,073,100 are taxed at 55%. Only 25% can be withdrawn tax-free, with the rest charged at usual income tax rates.

For most people, using both ISAs and SIPPS is prudent. ISAs can be accessed at any time and are great for financing big-ticket expenses in life, such as school fees or a wedding, or for clearing a mortgage.

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Pension assets are typically tied up until age 55 (rising to 57 in 2028). But they are better for supercharging your retirement savings due to the upfront tax relief.

Savers who have maxed out their pension and ISA allowances could look to Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs), which offer generous tax reliefs designed to encourage investment in unlisted companies.

When investors sell EIS and VCT shares, the gains are free from capital gains tax so long as the investment is held for at least three years for EISs, and five years for VCTs. Investors can also claim 30% tax relief on income, up to £1 million, which amounts to £300,000 of income tax relief.  Dividends paid are tax free for VCTs but not EISs.

However, investors should tread carefully with these schemes. They own risky smaller companies and there is no guarantee that they will make a positive return, although some losses can be offset against a tax bill.

Financial advisers generally warn against investing in these schemes purely to save on tax. Always do your own research before investing.