Avoiding Tax Surprises: What you need to know about your investments

At Ward Williams, we’ve noticed a growing trend: many of our clients are facing unexpected tax bills due to increased returns on their investment income and gains. If you’re feeling overwhelmed by the complexities of tax compliance, don’t worry—you’re not alone! Let’s break it down together and explore how these changes could impact you.

The Impact of investment returns on your taxes

With investment returns on the rise, it’s crucial to understand how this affects your tax situation. Here are two key tax-free allowances for savings income that you should know about:

• Personal Savings Allowance (PSA): £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Remember, additional rate taxpayers don’t benefit from the PSA at all.
• Starting Rate for Savings: You can earn up to £5,000 tax-free if your other income is below £17,570.

Rising Interest Rates: What you need to know

As interest rates climb, more clients are finding themselves exceeding these allowances. For example, imagine you’re a basic rate taxpayer with £50,000 in savings earning 3% interest. That would give you £1,500 in interest. After applying your £1,000 PSA, you’d be left with £500 of taxable interest, resulting in a £100 tax bill.

Have you ever been surprised by how much tax you owe? It’s a common experience, especially as interest rates rise!

Self-Assessment: Are you affected?

If your savings and investment income reaches £10,000 or more in a tax year, you’ll need to file a self-assessment tax return. With higher interest rates, this threshold is becoming easier to reach. But what if your income falls below this threshold? You still need to notify HMRC of any tax liability. Here are some questions to consider:

• How will you notify HMRC of your tax liability?
• Is it your responsibility to inform HMRC?
• Will you receive a tax calculation notice in the post?

The answer is that it’s your responsibility to notify HMRC of any tax liability, so make sure to keep them informed!

Understanding dividend income

Many clients are also seeing increased returns from their shareholdings. However, the tax-free dividend allowance has been dramatically reduced—from £5,000 to £1,000 for the 2023/24 tax year, and further down to £500 for 2024/25.

The tax rates on dividend income are lower than those for savings income:

• 75% for basic rate taxpayers
• 75% for higher rate taxpayers
• 35% for additional rate taxpayers

For instance, if you receive £1,500 in dividend income this tax year, you can use your £500 dividend allowance, leaving you with £1,000 of taxable income. This would result in a tax liability of £87.50.

Thinking about selling your assets?

If you hold income-generating assets, you might consider selling them to realise gains or to address your increased tax liabilities. However, before you make any decisions, think about the capital gains tax (CGT) implications.

The CGT annual exemption has decreased significantly—from £12,300 to just £3,000 for the current tax year. Gains exceeding this exemption are taxable, with rates of:

• 18% on residential property gains within the basic rate band, 24% on gains thereafter
• 10% on other gains within the basic rate band, 20% on gains thereafter
• If your gains fall below the annual exemption, you still need to report if your disposal proceeds exceed £50,000.

Navigating the complex tax system

As you can see, there’s a lot to consider when it comes to taxes and investments. Your self-assessment obligations are important, but so is understanding your tax liabilities, even if you don’t meet the self-assessment filing criteria.

How Ward Williams can help you

At Ward Williams, we’re here to make tax compliance easier for you. Here’s how we can assist:

• Proactive Tax Planning: We’ll help you structure your affairs to maximise tax efficiency.
• Self-Assessment Support: Our team can guide you through the process, whether you’re filing for the first time or voluntarily reporting your tax liability.
• Tailored Advice: We’ll consider your overall financial picture to provide personalised recommendations.

Next Steps: Let’s Connect!

If you’re concerned about how increased returns on your investments may affect your tax situation, don’t hesitate to reach out. Our team of expert accountants and tax advisers at Ward Williams is here to help you navigate these changes and optimise your tax efficiency. For more information please contact Simon Boxall on 01932 830664 or by email enquiries@wardwilliams.co.uk