Investors are expecting to pay £16.5bn in capital gains tax this tax year.
To put that into perspective, that’s enough to buy everyone in the UK a pair of tickets for front row seats at a premium West End musical on the 5 April.
But what is capital gains tax, how could it cause you issues and what can you do about it?
This article isn’t personal advice. ISA, pension, and tax rules can change, and benefits depend on your circumstances. If you’re not sure what’s right for you, ask for financial advice.
You can’t normally access money in a pension until you’re 55 (rising to 57 in 2028). While capital gains tax rates for Scottish taxpayers are based on rest of UK bands, Scottish income tax bands and rates of tax are different.
What is capital gains tax?
Capital gains tax (CGT) is the tax you pay on any profits you make when you sell something that’s increased in value, or you transfer it outside of your estate, for example to another person or into a trust.
It can apply when selling or transferring lots of different assets, like shares or property.
Why capital gains tax matters to investors
When you sell investments, you could be liable for CGT on any gain you make.
Everyone in the UK has a CGT allowance and if your taxable gains stay within this allowance, you won’t pay CGT.
If you exceed this allowance, you’ll need to pay the tax.
If you’re a basic-rate taxpayer, you’ll pay 10%. If you’re a higher or additional rate-taxpayer, it’s 20% (the rates are higher for gains relating to residential property).
It eats into your profit, naturally. But it can also mean that you end up paying tax if you switch between different investments.
This could put you in a pickle when rebalancing investments or making investment decisions. Trying to balance sound investment planning and tax planning isn’t fun. And you don’t want to let the tax tail wag the investment dog.
Why is capital gains tax more important this year than before?
Last tax year the CGT allowance was £12,300.
This tax year it’s £6,000. And next tax year, from the 6 April, it’s £3,000.
That’s less than a quarter of what it was before.
This means you could end up paying more tax as you’ll have a smaller allowance.
As a basic-rate taxpayer with a gain of £10,000, this is what your CGT would look like in:
2022/23: Nil
2023/24: £400
2024/25: £700
For higher and additional-rate taxpayers it would look like this:
2022/23: Nil
2023/24: £800
2024/25: £1,400
The above calculation is just an example, it assumes no gains have come from residential property.
Interested to see how capital gains tax could affect you? Use our capital gains tax calculator to find out.
What can investors do about it?
ISAs and pensions can step in and save the day. Last year they saved investors an estimated £23bn in tax.
This tax year you can put in up to £20,000 across all types of ISA and up to £60,000 (for most people) in pensions depending on your circumstances.
The deadline is 5 April to make use of this tax year’s allowances.
Investments can rise and fall in value and you could get back less than you invested.