What Hunt’s changes in thresholds and rates could mean for you

Millions of households face an extra tax burden, report Rachel Mortimer and Charlotte Gifford

Landlords, small business owners and DIY investors will be thousands of pounds worse off if tax reforms being considered by the Government come into force next year.

Chancellor Jeremy Hunt is considering sweeping increases to capital gains tax and levies on dividends in the Autumn Statement as part of a bid to plug a £50bn hole in public finances. The move would increase the tax burden on millions of households just as the cost of living crisis and soaring inflation squeezes personal finances.

HM Treasury said it would not comment on “speculation around tax changes outside of fiscal events”, but Hunt and Prime Minister Rishi Sunak have agreed those with the “broadest shoulders” should bear the brunt of efforts to shore up the public finances.

Here’s what the tax raid could cost.

Landlords

Landlords planning to sell up and reap the benefits of years of house price growth will find the Government is poised to take a bigger slice of their profits. Assuming capital gains tax was aligned with income tax – as was previously recommended by the Government’s tax adviser, the Office of Tax Simplification – higher-rate property investors would pay 40pc on gains, rather than 28pc.

It would mean a higher-rate taxpayer who bought a second property in August 2017 for £226,000, the average property price at the time, and sold it for £296,000 today would pay an additional £8,400 in tax on the gain of £70,000, paying £19,600 in tax, according to analysis by tax firm Blick Rothenberg.

An additional-rate 45pc taxpayer who bought an investment property for £380,000 and is selling it for £494,000 – a typical gain in a holiday let hotspot over the past two years – will have made a capital gain of £114,000. If their capital gains rate rises to 45pc, the top-rate threshold for income tax, they will be £18,700 worse off, paying £51,300 in tax.

Capital gains tax is levied on profits made from selling an investment, including shares and properties that are not a main home.

Nimesh Shah, of Blick Rothenberg, said: “Investors will need to seriously consider selling their properties before any rate rise takes effect to ‘lock-in’ the current highest rate of capital gains tax of 28pc.”

The raid would serve as a major blow to landlords who have relied on capital appreciation of their buy-to-let and holiday lets as a pension plan.

A growing number of investors have turned to limited company structures to escape punishing tax changes in recent years. But landlords paying themselves dividends will also be caught out if Mr Hunt follows through on plans to cut the tax-free allowance and raise levies on dividends.

The Chancellor is reportedly planning to bring in a 1.25 percentage point rise to all three dividend tax bands, alongside halving the tax-free allowance from £2,000 to £1,000.

DIY investors

Increasing dividend tax and cutting its tax-free allowance would also sting millions of smaller investors with portfolios held outside of Isas.

Under the current rules, a basic-rate taxpayer receiving £6,000 of dividends would pay £350 in income tax. But if the dividend allowance is halved to £1,000 and dividend tax rates increased by 1.25 percentage points, they would pay £500, according to Blick Rothenberg.

Retirees with share portfolios who rely on the income from dividends to top up their state pension could suffer. Making pension contributions can mitigate rises in dividend tax bills and most people can save up to £40,000 a year into their pot tax-free.

‘Investors will need to seriously consider selling their properties before any rate rise takes effect’

Self-employed and small business owners

Small business owners and the self-employed have already been hit by a 1.25 percentage points increase to dividend tax rates in April this year. The basic rate on any dividends over the tax-free allowance is currently 8.75pc, the higher rate is 33.75pc and the additional rate is 39.35pc.

Experts have warned another shake up of taxes on dividends would create a “significantly higher tax burden” for private business owners and selfemployed workers.

A top rate payer – who earns more than £150,000 a year – would be hit with a £456 annual tax increase on a dividend income of £6,000, with their bill rising from £1,574 to £2,030 should these changes come into effect.

Plans to stop corporation tax from rising from 19pc to 25pc next April were also scrapped last month, meaning limited company directors will be hit by a triple-whammy of higher dividend rates, higher corporation tax and controversial IR35 rules remaining intact.