How to beat Labour using your Isa

Next month tax allowances are squeezed again – and there could be worse to come, writes Charlotte Gifford

Savers must act now to protect their wealth from the Government – and an incoming Labour administration.

Tax allowances are being slashed again by the Conservatives in April and the new tax year is also highly likely to see a change of government as Labour storms ahead in the polls. A higher-rate, 40pc, taxpayer will be £335 worse off next year as a result of the tax squeeze on savings and investments, according to estimates by wealth manager Quilter.

Investors could face an even bigger hit if Labour increases taxes after getting into power. Labour is largely expected to win the next general election, which must be held before the end of January 2025.

The capital gains tax allowance is being halved from £6,000 to £3,000 in April while the dividend tax allowance will drop from £1,000 to just £500. As a result, an extra 1.1 million people will have to pay dividend tax from April 2024, according to figures from HMRC obtained in a Freedom of Information request by stockbroker AJ Bell.

In addition, the freeze to the personal savings allowance – the limit to how much savers can earn in interest before having to pay tax – means savers will keep less of the income they generate from cash.

The personal savings allowance has been frozen at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers since 2015. The hundreds of thousands of additional rate taxpayers who entered the 45pc threshold in 2023-24 get no savings allowance.

A higher rate taxpayer now needs just £10,000 in savings to exceed their personal savings allowance, so nearly 2.75 million people are set to pay tax on their cash savings interest for 2023/4, according to AJ Bell. This includes around one in 20 basic-rate payers, one in six higher-rate payers and around half of top-rate payers.

Jason Hollands, of Bestinvest, said: “While the Chancellor and Prime Minister have been seeking to reposition the Government as tax cutters since the Autumn Statement, as far as savers and investors are concerned, the tax noose continues to tighten aggressively.”

The tax raid could be about to get worse if Labour gets into power. The party has been determined to present itself as a tax-cutting party, and repeatedly highlighted Mr Hunt’s use of “fiscal drag” to raise the tax burden. The party has ruled out increasing income tax, National Insurance or capital gains tax if it wins the next election.

But some believe Rachel Reeves, the shadow chancellor, will have to raise taxes if the party is to fund its spending pledges – and “unearned income” from property or share portfolios are an obvious target. Labour is clearly split over capital gains tax with the deputy leader, Angela Rayner, last year refusing to rule out an increase.

Selling a second home incurs capital gains tax at 28pc (though this is being cut to 24pc from April) if you are a higher-rate taxpayer and 18pc if you pay the basic-rate of income tax. The rate is 20pc and 10pc for other assets such as shares. The suggestion to align income and capital gains rates was first made by the Office for Tax Simplification, a now-disbanded government agency. If this happened the capital gains tax rates would be 20pc, 40pc and 45pc depending on the seller’s income tax bracket.

According to analysis by Quilter, an increase to capital gains tax rates under Labour could cost higher-rate taxpayers an extra £900 in tax. This assumes a £250,000 capital gain from a property sale.

Isas remain the most effective way to shield your savings and investments from any tax changes. A family of four could stash

as much as £116,000 in Isas between now and April 7 using the full allowances available for the 2023-24 and 2024-25 tax years. Pensions also allow gains to build up free of tax. A family of four, where both parents earn £60,000 each, could add £255,000 over both tax years. Though of course pensions are not accessible until at least the age of 55 and withdrawals are subject to income tax.

Quilter has estimated that individuals with £20,000 outside of an Isa will lose £135 or £335 this year, depending on their income tax bracket.

Shaun Moore, of Quilter, said: “Lower allowances and higher interest rates mean you will likely find that your personal savings allowance, CGT annual exempt amount and dividend allowance will be decimated very quickly. Even only relatively small gains can waste huge amounts of your allowances next tax year.”

If you currently have investments outside of a tax-free wrapper, you can sell these and move the proceeds into an Isa in a process called “Bed and Isa”. Selling these ahead of the tax year end will allow you to make use of the £6,000 capital gains tax allowance before it is cut.

Over time, the capital gains tax savings can be huge. Assuming a £20,000 investment grows at 7pc a year – with income reinvested – in 10 years’ time you would have a gain worth £19,343, according to Bestinvest. If held in an Isa then it’s tax-free – saving £3,269.

Another way to save on tax is to make use of family’s allowances. Laura Suter, of AJ Bell, said: “If one half of the couple is a lower earner, or non-earner, there are tax advantages to moving certain investments or savings into their name, to make use of their lower tax rate. At the same time, if one half of the couple hasn’t used up their tax-free allowances in a year and the other has, it might be worth shifting assets to benefit from their personal savings allowance, capital gains tax allowance or dividend tax-free sum.

“If you’ve maxed out your Isa or pension allowances and your spouse hasn’t, you should consider whether you want to move money into their name to use those allowances.”

In addition, you can make use of your children’s allowances. You can invest up to £9,000 into a Junior Isa for every child under 18 every year.

From April 2024 onwards savers will also be able to open as many Isas as they want, where previously they could only open one of each type. This will allow savers to more easily take advantage of the top savings rates in the cash Isa market.