8 March 2023
Wealth manager RBC Brewin Dolphin says topping up your ISA before the tax year end could help you navigate cuts to the CGT and dividend allowances.
Impending cuts to the capital gains tax (CGT) exemption and dividend allowance mean maximising your £20,000 ISA allowance by the 5 April deadline could be more important than ever.
The cuts mean that anyone with investments outside an ISA wrapper could pay significantly more tax in the 2023/24 tax year than they did previously.
With the end of the tax year fast approaching, here are three reasons to top up your Investment ISA today.
1. ISAs offer tax-efficient income and growth
If you hold investments inside an ISA, any profits (‘gains’) you make are exempt from capital gains tax. Dividends from investments held inside in an ISA are also tax free. While this has always been the case, the government’s decision to slash the CGT exemption and dividend allowance makes ISAs an even more important tax planning tool.
In the 2022 autumn statement1, chancellor Jeremy Hunt announced that the CGT exemption – the amount of capital gains you can make before being taxed – will be cut from £12,300 to £6,000 on 6 April 2023 and then to £3,000 on 6 April 2024. The £2,000 annual dividend allowance will also be reduced to £1,000 and then £500.
If you hold investments outside an ISA and realise gains in excess of your CGT exemption, those gains will be taxed at up to 20%. Any dividend income you receive above your dividend allowance will also be taxed – at 8.75% if you’re a basic-rate taxpayer, 33.75% if you’re a higher-rate taxpayer or 39.35% if you’re an additional-rate taxpayer.
Ammo Kambo, financial planner at Brewin Dolphin said “There are several ways of mitigating CGT and dividend tax, but holding investments in an ISA is by far the simplest option. And you don’t need to declare ISAs on your tax return, helping to reduce your day-to-day admin.”
Our case study shows that neglecting to use just one year’s ISA allowance could potentially cost you thousands of pounds in tax in the future.
Michael is a higher-rate taxpayer who is already using his annual CGT exemption, dividend allowance, personal income tax allowance and personal savings allowance in full. This year, he forgets to use his £20,000 ISA allowance and instead leaves the money in a taxable General Investment Account.
Over the next 20 years, the investment produces a 4% annual return after charges, with 2.5% of this from growth and 1.5% from dividends. As a higher-rate taxpayer, Michael pays tax on these dividends at 33.75% each year, which works out at £1,750 in total. After 20 years, he sells the investment and realises a capital gain of £12,772; this is taxed at 20%, producing a CGT liability of £2,554*.
A simple mistake means Michael ends up paying £4,305 extra in tax. Had he used his 2022/23 ISA allowance, this could have been easily mitigated.
*Calculations are based on tax rates and allowances as at February 2023.
This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Forecasts are not a reliable indicator of future performance.
2. It’s a ‘use it or lose it’ allowance
Another reason why it’s important to top up your ISA now rather than delay for a couple of months is that your £20,000 annual ISA allowance is a ‘use it or lose it’ allowance. This means you can’t carry forward any unused portion to the next tax year.
Ammo Kambo said, “With the CGT and dividend allowances about to become less generous, the more of your investments that you can shield in an ISA, the better. It really is a case of act now before it’s too late.”
Shares beat cash over long periods
With interest rates on the rise, you might be wondering whether it’s worth holding your excess savings in a cash ISA instead. Cash ISAs are also tax efficient because interest is paid free of tax. However, while rates on cash ISAs look more attractive than a year ago, history shows that over long periods the stock market typically performs more strongly than cash.
Investing £20,000 in the FTSE All-World at the end of 1996 would have generated a return of £89,288 before charges by the end of 2022. This is on a ‘total real return’ basis, i.e. combining share price changes and dividend income, and adjusting for inflation. Conversely, leaving £20,000 in cash savings2 would have produced a return of only £23,072, after adjusting for inflation.
Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance.
Ammo said, “This period saw the Bank of England base rate hit 7.5%3 and the stock market experiencing some significant downturns, including the bursting of the dot-com bubble, the global financial crisis and the Covid-19 pandemic. While we can’t predict what will happen over the next two decades, history suggests that stock market returns far exceed those on cash over long periods.”
– ENDS –
Disclaimers
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444).
PRESS INFORMATION
For further information, please contact: Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: +44 (0) 20 3201 3026
Chloe McFarlane: chloe.mcfarlane@brewin.co.uk / Tel: +44 020 3201 3490
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £51.7* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 30th June 2022.
Disclaimers
The value of investments can fall and you may get back less than you invested. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444).
1 https://www.gov.uk/government/speeches/the-autumn-statement-2022-speech
2 Based on Bank of England base rate
3 https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp