Dividend and capital gains tax allowance cuts take effect

The dividend and capital gains tax allowances announced in Jeremy Hunt's 2022 Autumn Budget came into effect on 6 April 2023, cutting the amount that can be earned from dividends and capital gains before tax is due¹. The rates of both taxes are unchanged¹.

The annual tax-free allowance for dividend tax falls from £2,000 to £1,000 for the 2023-24 tax year, and is reduced again to £500 for 2024-25¹. Dividend income above the allowance is taxed at rates linked to income tax bands¹:

The capital gains tax allowance falls to £6,000 for an individual and £12,000 for a couple in 2023-24, from £12,300 and £24,600 respectively in 2022-23¹. It falls again in 2024-25, to £3,000 for an individual and £6,000 for a couple¹. Capital gains tax is payable when an asset is sold, and the allowance is the amount of profit that can be made on that sale before tax applies¹. The rate on the sale of an investment, unless it is a property other than a primary home, is 10% for basic rate income tax payers and 20% for higher rate payers¹.

As an illustration of the change, £2,000 of dividend income in 2022-23 fell within the tax-free allowance, but in 2023-24, with the allowance at £1,000, tax of £87.50, £337.50 or £393.50 would be due depending on the taxpayer's bracket¹. The same dividend income held in a stocks and shares Isa would not attract dividend tax¹.

Why it matters for households

The cuts affect anyone with investments held outside an Isa, including people who have not previously paid tax on that income¹. From 6 April 2023, dividend income above £1,000 across the financial year is taxed, and the allowance falls further to £500 from 2024-25¹. For capital gains, the profit that can be made on selling an asset before tax applies is £6,000 for an individual in 2023-24, falling to £3,000 in 2024-25¹.

Money held in an Isa is not subject to income tax, capital gains tax or dividend tax¹. Anyone over 18 in the UK can put £20,000 into an Isa each financial year, spread across different types of Isa, though only one of each type is permitted¹. The allowance does not roll over: once it reaches midnight on 5 April, it is lost¹.

The tax on investments outside an Isa therefore depends on the size of the returns and the taxpayer's band. Which? reported that the highest-paying instant access cash Isa then available paid 3.01%, against an inflation rate of 8.8% in January 2023¹. It also reported that money invested in a stocks and shares Isa should ideally be left alone for five years to mitigate losses, though withdrawals are permitted¹.

What happens next

The dividend allowance falls again to £500 for 2024-25, and the capital gains tax allowance to £3,000 for an individual and £6,000 for a couple in the same year¹. The rates of both taxes remain unchanged¹.