Edward Wilby
Private Client Director
In his 2023 Autumn Statement, the Chancellor, Jeremy Hunt announced that millions of people would pay lower National Insurance contributions (NICs) in 2024.
Employees saw the main rate of NICs fall from 12% to 10% on 6 January 2024, while self-employed workers will benefit from a reduction from 9% to 8% in the 2024/25 tax year in addition to the removal of the requirement to pay Class 2 NICs. The government says these cuts will benefit the average salaried worker on £35,400 by £450 a year.
Despite this headline-grabbing move, the truth is that millions of people will likely pay more tax in the coming year. Here are three reasons your tax bill could end up higher in 2024.
1. The Dividend Allowance is reducing
As recently as April 2018 it was possible to earn £5,000 in dividends (on top of your Personal Allowance) before any tax was due.
So, for business owners, drawing some earnings as dividends to benefit from this Dividend Allowance, and paying Dividend Tax that was lower than the corresponding Income Tax rate, made sense.
It also enabled investors to draw an income from dividends with the first £5,000 of this protected from tax.
However, the Dividend Allowance – the amount in dividends you can earn in addition to your Personal Allowance before tax is due – has fallen twice since 2018 and will fall again in 2024. In the 2024/25 tax year, you will only be able to earn £500 in dividends before tax is due.
The reduction to £1,000 in 2023/24 saw 635,000 people pay Dividend Tax for the first time, the Telegraph reports. Moreover, the further reduction in 2024/25 is forecast to drag a further 1.15 million investors into the tax net for the first time.
The amount of Dividend Tax you pay depends on your Income Tax band:
If you earn more than £10,000 in dividends, you will have to complete a self-assessment tax return.
The reduction in Dividend Allowance means that, if you earn dividends from shares you own in a business, your tax liability is likely to rise.
In simple terms, if you’re an additional-rate taxpayer and you earn £5,000 in dividends, you’ll pay £1,770.75 in Dividend Tax in 2024/25, compared to no Dividend Tax in 2017/18.
2. The amount of profit you can make before Capital Gains Tax is due to fall in April
You pay Capital Gains Tax (CGT) on the profits you make when disposing of assets such as:
- Property that’s not your main home
- Non-ISA investments
- Most personal possessions worth more than £6,000, apart from your car.
The Capital Gains Tax Annual Exempt Amount represents the amount of profits you can make before CGT is due. This stood at £12,300 in 2022/23 before being reduced to £6,000 in 2023/24. It will fall again to just £3,000 in 2024/25.
If you make a profit on a second property, non-ISA shares, or any other assets, this reduced exemption means that more of these gains are likely to be liable for CGT.
The table below shows the additional CGT you will pay in 2023/24 and in 2024/25 as the Annual Exempt Amount falls.
Source: The Telegraph. Figures assume gains are higher than the previous Annual Exempt Amount of £12,300.
From 6 April 2025, if you’re a higher- or additional-rate taxpayer, you’ll pay £9,400 in CGT on every £50,000 in investment profits made outside of an ISA. This is up from £7,540 in the 2022/23 tax year.
You may wish to prioritise making the most of ISAs, crystallising gains up to the Annual Exempt Amount, and planning as a couple where appropriate in light of this change.
3. Many tax thresholds and allowances are frozen
One key way that millions of people end up paying more tax is not because tax rates are rising, but because the thresholds at which taxes become due have either been frozen in cash terms or have failed to keep pace with inflation and the rising cost of living. This is commonly known as “fiscal drag”.
As an example, the Inheritance Tax (IHT) nil-rate band – the amount you can pass to your beneficiaries before IHT becomes due – has been frozen at £325,000 per individual since the 2009/10 tax year and will remain at this level until 2028.
Had this threshold risen in line with inflation over the intervening period, it would now be £496,314.
Similarly, the annual IHT gifting exemption has remained at £3,000 per person since 1981 – a time when the Express reports it could easily cover the average cost of typically-gifted items such as a house deposit (£2,373) or first car (£1,000). Had this risen in line with inflation, it would now be £11,068.
The frozen Income Tax Personal Allowance and the thresholds at which higher rates of tax become applicable are also resulting in millions of people paying more tax. This includes the additional-rate threshold for income tax which was lowered in April 2023 from £150,000 to £125,140 (to align with the tapering of the personal allowance).
The Office for Budget Responsibility says that, between 2022/23 and 2028/29, the threshold freezes mean 3 million more people will pay higher-rate (40%) Income Tax, while 400,000 more will pay the additional rate of 45%.
So, as your earnings increase while thresholds remain frozen, you will pay tax on a greater proportion of your overall income. And, with the IHT nil-rate band still at 2009 levels, it makes planning to pass on your wealth tax-efficiently even more of a priority.
Get in touch
To find out how we can help you to make the most of your tax allowances and exemptions – particularly in light of many allowances becoming less generous – please get in touch.
Contact us online or call 020 7400 4700.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, cashflow planning or tax planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
