Labour and Lib Dems changes would see investor's tax rates double

Pledges made in both the Labour and Liberal Democrats manifestos would cost investors through the hiking on tax rates to bring them in line with income tax, AJ Bell said.

The investment platform suggested this would be the case for both capital gains and dividends in the event of a Labour government, but just on capital gains under the Lib Dems.

Currently, investors have a £12,000 capital gains allowance and a £2,000 dividend allowance, but as the UK readies for the 12 December election, both parties have recently announced they are aiming to slash the capital gains allowance – with Labour going a step further in cutting the dividend allowance.

Commenting on the changes to dividend allowance, AJ Bell personal finance analyst, Laura Suter, said: “Income investors who have considerable savings outside of an ISA or pension have already been clobbered in recent years by the Conservative government, which first jacked up the rates of tax on dividends, and then slashed the annual dividend tax free allowance.

“This crackdown would be supercharged under Labour, effectively cutting the current dividend tax free allowance in half to just £1,000 and taxing them like income.

“In terms of the tax rates paid on dividends, basic-rate taxpayers will see a big rise from 7.5% to 20% under Labour. Those earning £80,000 would face a double whammy of an increase in their income tax rate and their dividends being taxed as income, taking them from a 32.5% current tax rate to 45%.”

Where Labour’s policy to tax dividends like income goes a step further than the Lib Dems, the two parties would both see changes made to taxing capital gains.

AJ Bell has suggested such a move would mean investors will be taxed on up to an extra £12,000 each year, and would also see their tax rates at least double.

Commenting on the proposed capital gains tax changes, Suter added: “Higher-rate taxpayers will be hit as they’ll see their tax on gains go up from the current 20% to 40% under Labour and to 41% under the Lib Dems, while those earning (over) £125,000 will go from a 20% tax rate to 50% under Labour.

“Someone with £60,000 in their investment account, who gets 5% returns a year and sells their gains after 10 years will pay up to £12,210 more across 10 years under the Lib Dems, and £7,630 more under Labour.

“A basic-rate taxpayer would have to stump up £2,537 more under Labour and £5,351 more under the Lib Dems, while high earners on £125,000 would pay £6,352 more under Labour and £10,324 under the Lib Dems.”

“However, the annual ISA allowance is now £20,000, meaning people can squirrel more of their money away from the taxman. As this allowance has become more generous, more people have shifted their investments into ISAs, so will be protected from these planed tax hikes. We’ll see more people shifting their money into their ISA if Labour came to power, to help mitigate the tax hit.”

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