Tax: are you in Rishi’s firing line?

Tax: are you in Rishi’s firing line?
Changes to how your investments are taxed might be coming in 2021
Dan Lane
Published
December 4, 2020
Updated
August 23, 2021

I would say the dust has settled on the Chancellor’s Spending Review last month but probably the most important implications of it are still up in the air.


Hikes in taxes look increasingly likely but where the Chancellor will concentrate his efforts, to claw back the most he can without upsetting the apple cart, is still unclear.


However, there have been some reasonable suggestions since Mr. Sunak’s speech - and ones worth getting to grips with now before any further announcements come in March.


Capital gains tax in the crosshairs

Having just asked for a review to be conducted on capital gains tax (CGT), we know it’s high up on the Chancellor’s discussion points.

If he likes what he sees and decides current rules are ripe for changing, the levels of CGT and income tax could come closer together, with a knife taken to the capital gains annual allowance.

CGT (the tax you pay on investment gains outside an ISA or pension) currently stands at 10% and 20% for most taxable assets, depending on the level of income tax you currently pay, or 18% and 28% for residential property that is not your main home.  

Income tax is charged at rates of 20%, 40% and 45%.

One way for the Chancellor to bring these levels closer together could be to bring all CGT in line with the higher levels for residential property.

Or another way could be to simply apply the income tax rates to CGT too. So, you’d pay the same level of income tax and CGT.

Does it affect me?

The question then is - would I be any worse off?

Well, relatively few investors actually pay CGT because most use their ISA first (in which you pay no tax on gains) for non-pension savings.

Even when you’ve filled that up with £20,000 you still have an allowance of £12,300 before you’d have to start paying CGT.

That means only the investors at the top of the tree would possibly be worse-off, but given that there aren’t many of us already paying CGT, the amount Rishi could raise from the changes isn’t likely to move the dial.

Not after the government spending in 2020.

Pension tax relief

So the next course of action might be a raid on pensions and, in particular, tax relief.

Going by the income tax rates above, those paying 20% tax currently get the same level of tax relief, so a £100 contribution to your pension only ends up costing £80. The government tops up the rest.

That same advantage is enjoyed by those higher and additional rate taxpayers, who benefit from 40% and 45% tax relief. 

If pensions are in the Chancellor’s sights, expect that upper end to come down.

And it’s not out of the question for income tax to be on the table too. Raising the top tax band to 50% will provoke little quarrel from most of the country, as it only targets the nation’s top earners.

Although what this could realistically raise wouldn’t be enough to balance the books.

While we wait and speculate over the next few months, investors would do well to get their houses in order and make sure they are using their tax-efficient ISAs and pensions sensibly, and to their fullest benefit where possible. 


Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.


When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.


Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).


Important Information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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