That is exactly right. Just like your income tax goes from 20% to 40% on every penny after £46,350. And you NI goes from 12% to 2%.
Not quite. Once Freetrade launches ISA, you can deposit up to £20,000 per annum with no dividend tax and CGT to pay. Then if you have holdings outside of ISA, the proceeds will be liable for capital gains and dividends for tax. And that is only once you exceed your allowances (currently £11,700 and £2,000 respectively). And you are right, you never know which way these allowances will go, the one for dividends was £5,000 only last year.
Also, remember that if you are lucky enough to fill your annual ISA and have more money to invest (a good problem to have), you can invest into your SIPP up to £40,000 per annum, which has identical benefits to ISA except you will only be able withdraw after the age of 55-57 (depending on your current age).
And even if you are still lucky to fill that one in, you can carry forward your pension allowance for up to three years, meaning you can fill another 3 x £40,000 into the SIPP, all in the same year.
If you are too fortunate to have gone through all of those steps, you may consider EIS and SEIS eligible investments (which you are of course aware of). If you hold for over three years, they are also tax-free if you manage to sell them.
There you go, up to £200,000 in a single year to invest with no risk of CGT or dividend tax
However regarding the 32.5% dividend tax, that applies to your whole dividend if you are higher tax income? Even if you are at the lowest level for higher rate. One minute you are paying 7.5% and then with a tiny pay rise you are now paying 32.5% tax?
Very interesting topic.
If you had Berkshire Hathaway B shares which doesn’t pay a dividend bought for £10,000 and grown to £100,000 as long as you sold an amount below the capital gains tax threshold in each tax year would this avoid all tax on this investment growth ?
I see what you mean. Usually UK tax is quite fair (except inheritance, total insanity) and ensures you pay the least amount you are liable for. But dividend tax is an exception. You will jump from from 7.5% to 32.5% immediately if you normal salary is over £46,350.
However, you can still play with you £11,850 allowance they way you please:
Say you salary is £28,000, you other income is £9,000 and your dividend income is £18,000 (£55,000 in total).
The salary is taxed first, which all fits in the basic rate band. This leaves £6,500 (£34,500 – £28,000) of the basic band for other income. Ignoring the personal allowance for now.
Other income is taxed next. That is remaining £6,500 at 20% again. Plus you’d use £2,500 of your allowance to cover it up to £9,000. This means that the salary and non-dividend income used up the total basic rate tax and £2,500 of the personal allowance. This leaves £9,350 of the personal allowance for dividend income.
The dividend of £18,000 exceeds the remaining personal allowance, so £8,650 of the dividend will be subject to higher rate tax. The dividend allowance covers £2,000 of this leaving mere £6,650 subject to tax at the higher tax rate of 32.5%, as opposed to the entire £16,000 (£18,000 less £2,000 allowance) being taxed at that huge rate.
Of course, everyone’s circumstances would be different and the example is rough. But it just shows that you could utilise your entitlement in any way that will let you minimise tax paid.
Again, if it is in ISA, anything is tax free and you can add up to £20,000 per year. Buying/selling within ISA will not trigger any tax liabilities either.
If it is outside ISA, just as you said, you can sell ensuring that the crystallised assets do not exceed CGT allowance (£11,700), so small chunks every year.