Investing in a Stocks and Shares ISA means protection from both capital gains tax and dividend tax. From 6 April, the tax laws around investing are changing.
As a result, it’s never been more important to take advantage of the benefits of a Stocks and Shares ISA. Even for investors who don’t think they’ll qualify for taxes, I think it’s worth it.
Capital gains tax
As a basic rate taxpayer in England, I don’t have to pay capital gains tax (CGT) on anything up to £12,300 per year in profits from selling shares. After that, gains are taxed at 10%.
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This is changing, though. The amount I’ll be able to make before paying CGT is falling to £6,000 in April, and to £3,000 in 2024.
Here’s an outline of how the tax changes might make a difference to an investor like me:
| Gains from selling shares | Current tax | From April 2023 | From April 2024 |
|---|---|---|---|
| £5,000 | Nil | Nil | £200 |
| £10,000 | Nil | £400 | £700 |
| £20,000 | £770 | £1,400 | £1,700 |
| £40,000 | £2,770 | £3,400 | £3,700 |
Dividends
Something similar is true of dividends. At the moment, the first £2,000 of dividends I receive are exempt from tax and above that, it’s 8.75% for a basic rate taxpayer like me.
From April, the amount I can receive before paying tax goes down to £1,000. And then it’s set to reduce to £500 from 2024.
That means that for someone like me, the tax implications of receiving dividends is going to be as follows:
| Annual dividend income | Current tax | From April 2023 | From April 2024 |
|---|---|---|---|
| £1,000 | Nil | Nil | £43.75 |
| £2,000 | Nil | £87.50 | £131.25 |
| £5,000 | £262.50 | £350 | £393.75 |
| £10,000 | £700 | £787.50 | £831.25 |
ISAs
The numbers are about to go up significantly in both cases. But investments held in a Stocks and Shares ISA are exempt from both taxes.
I don’t expect to make enough to be liable for either tax this year. Despite this, there are two reasons why investing as much as possible in an ISA is a good idea for an investor like me.
First, I expect to be above the thresholds for both CGT and dividend tax in the future as my investments increase. As the tax-free allowances fall, I’m likely to cross over those thresholds even sooner.
The ISA limit resets each year and can’t be carried forward. As such, it’s worth using my allowance this year to prepare for when I think I might stand to benefit.
Second, the stock market is a volatile and difficult to predict. Even this year, something I don’t foresee might make me eligible for tax.
A jump in share prices might cause me to incur CGT if I wanted to sell. And a big dividend – for example, a one-off special dividend – might put me over the dividend tax threshold.
That’s why a Stocks and Shares ISA is a big part of my investment plan. With the tax allowances coming down, there’s never been a more important time to take advantage.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
