Three rule changes effective from 6 April: how could they impact you?

6 April heralds the start of the 2024/25 tax year. By the time the new tax year draws to a close, the government expects it will have collected more than £1 trillion in tax, up from around £925 billion in the last full tax year. 

Two rule changes are partly responsible for the rising tax take: the cuts to dividend and capital gains allowances from 6 April 2024. When combined with frozen thresholds for higher and additional rate income tax, many investors may find they are both more exposed to these taxes and paying them at a higher rate. 

However, on the plus side, a third change, also effective from 6 April, could be an opportunity that reinforces the tax efficiency of pensions.

Tax benefits depend on circumstances and rules can change. 

The dividend allowance, the level of dividends investors can receive tax-free each tax year, continues to shrink.

As recently as 2017/18, an investor could receive £5,000 in dividends tax-free. Since then, the dividend allowance has seen successive cuts, first to £2,000, then £1,000, and from 6 April 2024 to just £500. 

So, a £5,000 dividend that could have been tax-free in 2017/18 could now attract a bill of just over £1,500 for a higher-rate taxpayer. For an additional-rate taxpayer, the bill would near £1,800.

What options might you consider?

ISAs are probably most investors’ first port of call. 

If the investment is held in an ISA, any UK dividends are normally tax-free. So you could consider making full use of your yearly ISA allowance, currently £20,000, and note the government is consulting on creating an additional £5,000 allowance for investing in UK assets. Both the Wealth Club Portfolio Service and the Quality Shares Portfolio can be held within an ISA.

Investing in a Venture Capital Trust (VCT) could be an additional option for experienced investors caught by changes in the rules, and happy with the risks. Any dividends paid by a VCT are tax free: they don’t use up your dividend allowance and do not need to be declared on your annual tax return. 

So, a £5,000 dividend from a VCT means you receive £5,000 in cash. Effectively an additional-rate taxpayer would need to receive a taxable dividend of nearly £8,250 to receive £5,000 in cash (under current rules, assuming the tax-free £500 has already been used). Dividends are variable and not guaranteed.

You can invest up to £200,000 tax-efficiently in a VCT each year and there is no lifetime limit. So, an investor who has made full use of their other allowances could find that VCTs offer an additional route to creating a tax-free source of income.

The capital gains tax (CGT) allowances have also been cut. From 6 April, the allowance halves to £3,000 – down from £6,000 in 2023/24 and £12,000 in 2022/23. This means that increasingly small gains are potentially exposed to a CGT charge.

What options might you consider?

Once again, ISAs could be useful as any gains from investments held in the ISA should be tax-free. The same is true of investments held in a pension, such as a SIPP (Self Invested Personal Pension). Investors could also manage their CGT liability by using the annual allowance each year, crystallising losses, or transferring assets to a spouse. 

But for experienced investors still concerned about CGT, there are options to mitigate CGT through investing tax efficiently in government-backed schemes. 

Increases in the value of shares in either VCTs or investments made under the Enterprise and Seed Enterprise Investment Schemes (EIS and SEIS) do not attract capital gains tax, which could mean more of the annual allowance is available for any gains made elsewhere.

Potentially more significantly, both EIS and SEIS can also help experienced investors mitigate tax on gains made elsewhere. Investors under EIS could defer a capital gains tax bill while SEIS investors could benefit from up to 50% CGT relief.

EIS capital gains deferral relief 

When you invest any portion of a gain in EIS, you should be able to defer that portion of the gain for as long as the money stays invested – potentially indefinitely. 

For example, if you had a gain of £100,000, you could defer its full value by investing it in EIS; invest £50,000 and you could defer half the gain. The tax will become payable at the prevailing rate of CGT when you realise your EIS investment, unless you roll that into another EIS investment. You could defer gains realised up to one year before and three years after your EIS investment date. You can invest up to £2 million (if including knowledge-intensive EIS) per tax year. 

SEIS capital gains reinvestment relief – save up to 50% 

The most generous tax reliefs are reserved for investing in the youngest – and therefore highest-risk – companies, under SEIS. When you invest any portion of a gain in SEIS, you could reduce the CGT bill on that portion of the gain by up to 50%. 

For example, if you had a gain of £100,000 with a CGT bill of £20,000 and you invested the full £100,000 in SEIS, you could reduce the CGT payable to just £10,000. You may use the relief on investments in the tax year of your investment, or the year before. To use the CGT relief, you must have also claimed the income tax relief (up to 50%) in the same year. You can invest up to £200,000 in SEIS investments each tax year.

Pensions offer perhaps some of the most generous tax reliefs available.

When you contribute, you could receive up to 45% tax relief, potentially worth up to £4,500 on a £10,000 contribution. Once your money is invested, you benefit from tax-free growth whilst your money is invested and up to 25% tax-free cash when you take money out. Most UK tax residents under age 75 are eligible for pension tax relief on contributions. Plus, pensions are not typically subject to inheritance tax, which many could find appealing (you can read more on the tax reliefs in our recent article).

There was, until recently, a sting in the tail. The Lifetime Allowance historically set the limit of the total value that could be built up in pensions without incurring a tax charge. That charge was removed last year and from 6 April 2024 the Lifetime Allowance has been abolished altogether.

This means there will no longer be limits on how large a pension you can build tax efficiently. That said, the government has introduced a new allowance to limit the amount that can be taken tax free from pensions as a lump sum. As previously, from age 55 (raising to 57 from 2028), most people can take up to 25% of their pensions as a tax-free lump sum. However, there is now a monetary cap of £268,275. If you have Lifetime Allowance protection, your lump sum allowance may be different. Different limits apply on death benefits and overseas transfers allowances.

Most people should be able to build a larger pension if they want and can afford to – and benefit from significant tax relief in the process – but a greater proportion may be taxed when they take the money out.

If you are looking for a potential investment for your SIPP (Self Invested Personal Pension), we have two ready-made options for you to consider: the Wealth Club Portfolio Service and the Quality Shares Portfolio. Both are designed to help more experienced investors grow their wealth in the long term without the hassle of selecting your own investments (we do that for you).