Tax burden set to rise in 2025 due to triple whammy of changes

• Interactive investor explores the impact of changes to capital gains tax, dividend tax allowances and the impact of fiscal drag on people earning £35,000, £50,000 and £100,000
• The calculations assume realising a £10,000 gain and receiving £2,000 in dividends after 30 October 2024
• Myron Jobson, ii’s senior personal finance analyst, outlines ways to save on tax.

The tax regime for individuals has become less generous in 2024 due to a triple whammy of cuts to the capital gains tax (CGT) and dividend tax allowances, increases to CGT rates, and the freeze on the threshold at which income tax becomes payable.

New calculations by interactive investor show that someone earning an annual salary of £35,000 realising a £10,000 gain and receiving £2,000 in dividends in 2025 faces paying £1,261 more in tax.

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This figure rises to £1,831 for someone earning £50,000 and £3,836 for those earning £100,000.

Behind the tax burden rise

The CGT allowance was reduced from £6,000 at the start of the 2023-24 tax year to £3,000 in April 2024. Our CGT calculation assumes a £10,000 gain was realised ahead of the CGT allowance cut.

In addition, CGT rates on shares increased from 10% to 18% for basic-rate taxpayers on 30 October 2024 and 20% to 24% for higher-rate taxpayers. This means that gains held outside tax wrappers such as ISAs and SIPPs are now subject to greater tax.

On a £10,000 investment gain, this translates to an additional tax burden of £860 for a basic-rate taxpayer (workers earning £12,571 to £50,270) and £880 for higher-rate taxpayers (those earning £50,271 to £125,140).

A similar story applies to the dividend allowance, which was cut from £1,000 in April 2023 to £500 in April 2024.

The additional tax burden on dividends totalling £2,000 is £43 for basic-rate taxpayers and £168 for higher-rate taxpayers.

Taypayers’ rate of CGT and dividend tax is based on their total taxable income, including salary, gains and dividend income. This means gains and dividend income can end up pushing lower earners into a higher tax band. Such is the case in our £50,000 earner example, where the capital gain and dividend realised pushes the earner into the higher-rate tax bracket.

Meanwhile, the freeze on the personal allowance at £12,570 from April 2023 until April 2028, combined with wage inflation, means more people will pay higher taxes in the coming years - known as fiscal drag.

This means those earning £35,000, £50,000, or £100,000 would see their tax burden increase by £358, £783, and £2,788 in 2025, respectively, due to frozen tax thresholds. This is because tax thresholds are not keeping pace with wage inflation, currently 4.8%.

The tax burden jumps sharply for income between £100,000 and £125,140 due to the gradual withdrawal of the tax-free personal allowance, which adds an effective 20% tax on top of the 40% higher rate.

Offsetting some of this fiscal drag is the reduction in the rate of national insurance (NI) paid by employees. The rate fell from 10% in January 2024 to 8% in the new tax year. This reduction lowered the equivalent full-year NI bill by £123 for those earning £50,000 and £92 for those earning £100,000. 

However, those earning £35,000 would have seen an increase in their NI tax bill, by £22 if their salary increased by 4.8% because of the frozen NI threshold.

Extra ‘fiscal drag’ burden in 2025

Source: interactive investor. Compares income and NI due during the calendar year of 2024, to tax due if pay rose in line with wage inflation of 4.8% but thresholds remained frozen.

Heightened tax burden in 2025

Source: interactive investor. Compares income and NI due during the calendar year of 2024, to tax due if pay rose in line with wage inflation of 4.8% but thresholds remained frozen. Also assumes capital gains realised ahead of the new tax year in April when the CGT allowance was cut to £3,000.

Myron Jobson, senior personal finance analyst at interactive investor, says: “2024 has been rife with tax changes, from the cuts to the capital gains and dividend tax allowances to the stealthy fiscal drag tax grab, which, in many cases, will result in a significantly higher tax burden in the new year.

“More people have been dragged into paying tax or higher rates of tax as their wages rise and cross the unchanging thresholds, commonly referred to as fiscal drag. This is despite savings from the cuts to the NI rate. Those with investments held outside tax wrappers such as ISAs and pensions, which shield gains, dividends, and interest from tax, now face a significantly higher burden, exacerbated by the recent hikes in CGT rates announced in the October Budget.

“Our calculations offer some insights into how the tax burden has changed, but it is important to remember that tax is rarely a one-size-fits-all affair. Each individual’s financial circumstances play a crucial role in determining how changes to the tax regime impact them. It’s essential to take a closer look at your personal situation to understand the nuances and opportunities these changes may present.

“Navigating the tax landscape can feel like a minefield, especially with so many moving parts. But by taking the time to explore your options — from pensions and beyond — you can take meaningful steps to reduce your tax bill. If your tax position is complicated, it may be worth seeking professional advice from a certified tax adviser to identify where you can save.”

How to save on tax

Myron Jobson outlines key tax-saving strategies.

Income tax savings 

Marriage Allowance

If married or in a civil partnership, you can transfer up to £1,260 of unused personal allowance to your partner, saving up to £252 annually.

Salary sacrifice

Paying into a workplace pension via salary sacrifice reduces your taxable income and NI bill. However, it may impact entitlements like maternity pay or mortgage applications, so consider the broader financial implications.

Pension contributions and Gift Aid

Contributions to a self-invested personal pension (SIPP) or donations through Gift Aid reduce taxable income. These are especially useful for restoring personal allowances if your income exceeds £100,000, or regaining Child Benefit eligibility.

Investment savings

Bed & ISA

Shifting investments into an ISA protects future gains and dividends from tax. This involves selling and rebuying shares, which may trigger CGT charge, but offers long-term tax advantages.

Spread gains across tax years

To minimise CGT, split sales across tax years (e.g. sell on 5 April and 6 April). Gradual sales can also help keep you within a lower tax bracket.

Use losses to offset gains

Losses on investments can offset gains, reducing your overall tax liability.

Transfer assets to a spouse

Transferring assets between spouses or civil partners (tax-free) allows both to use their allowances, potentially doubling CGT and dividend tax thresholds. This is especially beneficial if one partner is in a lower tax bracket.