Income Tax and Capital Gains Tax (CGT) Allowances: At a glance

The Finance (No.2) Act 2024 received Royal Assent on 24 May 2024, in the final days before Parliament was prorogued.

The Act provides for a number of measures announced at the Spring Budget 2024, including a reduction in the higher rate of CGT for gains on residential property from 28% to 24% from 6 April 2024. The lower rate remains at 18%.

This change is in contrast to the Government’s recent trend of freezing or reducing income tax and CGT allowances, as part of their broader efforts to increase tax revenue and address fiscal challenges, as set out below.

Personal Allowance

The personal allowance is the amount of income you can earn before you start paying income tax. For the 2023/24 and 2024/25 tax years, the standard personal allowance remains frozen at £12,570. However, it is reduced by £1 for every £2 of income over £100,000. This tapering effectively means that for incomes over £125,140, the personal allowance is reduced to zero, leading to a higher marginal tax rate. As inflation rises, the real value of the personal allowance decreases, effectively reducing the amount of income that is tax-free. This leads to higher effective tax rates on income as more of it falls into taxable bands (the phenomenon referred to as ‘fiscal drag’).

Dividend Allowance

The dividend allowance, which allows taxpayers to receive a certain amount of dividend income tax-free, has been significantly reduced over the last couple of years. The allowance dropped from £2,000 to £1,000 from 6 April 2023, and then from 6 April 2024 the allowance has been halved again to just £500. This reduction means that more dividend income will be subject to tax at the applicable rates: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.

CGT Allowance

The CGT allowance has also seen significant reductions. For the 2023/24 tax year, the annual exempt amount was cut from £12,300 to £6,000, and then reduced further to £3,000 from 6 April 2024 for individuals, estates, and trusts for disabled people. Gains above these thresholds will be subject to CGT at rates of 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers (or 18% and 24% for gains on residential property).

The annual exemption for trusts is half that of individuals, so it has been reduced to £1,500 for the 2024/25 tax year.

Summary of tax allowances:

The reduction in these allowances has several implications:

• Many taxpayers will face higher tax liabilities as more of their income falls above the reduced allowances. This is particularly significant for investors and higher earners who rely on dividends and capital gains for their income.
• Taxpayers may need to adjust their financial planning strategies. For example, investors might seek tax-efficient investment options such as ISAs, which are not subject to income tax or CGT, or consider restructuring their income to optimise tax efficiency.
• With more taxpayers affected by these changes, there is likely to be an increased administrative burden both for individuals managing their own tax affairs and for HMRC in processing a higher volume of tax returns and queries.

Depending on the outcome of the general election, tax rates and allowances are likely to be subject to further change over the next year or so.

If you would like further information or advice on Income Tax or CGT, please get in touch with your usual contact at Michelmores or a member of our Tax, Trusts & Succession Team.