Ensuring your business owner clients make the most of the available tax allowances and exemptions can help them retain more of their wealth. Staying on top of upcoming tax and regulatory changes is an important part of this.
At the start of the 2024/25 tax year, the government will halve both the Dividend Allowance and the Capital Gains Tax (CGT) Annual Exempt Amount.
This could have several implications for your business owner clients, and as a result, it could be pertinent for them to reassess how they receive money from their businesses and investments.
The upcoming change will be the second reduction in both the Dividend and CGT allowance in as many years. Consequently, your clients could be facing substantially higher tax bills than they did in the 2022/23 tax year.
Read on to discover exactly what the upcoming changes are and how they could affect your clients.
The government is halving the Dividend Allowance in April
The Dividend Allowance is the amount individuals can earn tax-free through dividends (in addition to their Personal Allowance) in a given tax year. From 6 April 2024, the government will reduce the Allowance from £1,000 to £500.
According to figures provided by HMRC, this change will make an estimated 4.4 million individuals worse off in 2024/25.
The halving of the Dividend Allowance comes after a similar change at the beginning of the 2023/24 tax year when the government cut the allowance from £2,000 to £1,000.
This means that, from 6 April 2024, the Dividend Allowance will have fallen from £2,000 to £500 in just two years.
The Dividend Allowance changes could mean business owners pay more tax
The upcoming reduction in the Dividend Allowance will mean your business owner clients will pay tax on a greater proportion of their income from dividends – assuming their dividend income remains constant.
The amount of tax an individual pays on dividends depends on their Income Tax band. Any dividends an individual receives will be added to the total of all their other income and taxed according to which income bracket the dividend falls into.
For the 2024/25 tax year, all dividends over £500 (assuming no Personal Allowance is available) will be taxed accordingly:
- Basic rate – 8.75%
- Higher rate – 33.75%
- Additional rate – 39.35%.
Your business owner clients affected by this change may want to reconsider how they receive income from their business in the 2024/25 tax year. Additionally, they may also hold some dividend-paying investments which may now attract more tax.
The Capital Gains Tax allowance will also be halved at the same time
As they cut the Dividend Allowance, the government is planning to simultaneously halve the CGT Annual Exempt Amount from £6,000 to £3,000 for individuals, and from £3,000 to £1,500 for most trustees.
The Annual Exempt Amount defines the profit your clients can make on the disposal of certain assets (such as non-ISA investments, second properties, and personal possessions worth more than £6,000) in a given tax year before they have to pay CGT.
Like the Dividend Allowance, the Annual Exempt Amount was previously reduced in April 2023. It fell from £12,300 to £6,000 for individuals, and from £6,150 to £3,000 for most trustees.
Clients may want to reconsider how they dispose of assets due to the reduction in Capital Gains Tax allowance
In preparation for the upcoming change to the Annual Exempt Amount, your clients who are planning on disposing of assets may want to consider crystallising any gains up to the £6,000 limit before the reduction in the CGT allowance occurs on 6 April 2024.
Additionally, they may want to make the most of tax-efficient wrappers such as ISAs and pensions where no CGT is paid on any gains. If your clients are liquidating an investment portfolio, it could be advantageous for them to slow the rate at which they do so, spreading the process over more years to reduce their CGT bill.
Finally, married clients can benefit from the “no gain/no loss rule” – transferring assets between one another without paying any tax. Because the Annual Exempt Amount applies to an individual, it may be more tax-efficient for a couple to share assets between themselves before disposing of them.
Speaking to a financial planner can help your clients plan tax-efficiently
If your business owner clients are looking to minimise the amount they pay in Dividend Tax and CGT this year, then they could benefit from talking to a financial planner. At Santorini Financial Planning, we specialise in working with small and medium-sized business owners looking to achieve their financial and life goals.
If you have any clients who may be interested in our services, they can email info@santorini-fp.co.uk or call 01509 278620 to find out more about how we can help.
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 tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
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.
