Labour’s first Budget for 14 years has brought a series of sweeping changes to taxation that’s sure to directly or indirectly impact the pockets of residents throughout the United Kingdom. For investors up and down the country, a revamp of Capital Gains Tax (CGT) is likely to be the biggest headline from the event. 

Chancellor of the Exchequer, Rachel Reeves, attempted to maintain Labour’s pledge to avoid taxing working people by pushing the brunt of the Budget’s £40 billion in tax hikes onto employers, with a specific focus on National Insurance contributions increases. 

This meant that the CGT range hikes to 33% and 39% that the government were reportedly testing were scrapped in favour of a softer range between 18% to 24% for basic and higher rate taxpayers respectively. 

This marks a still significant increase on the previous Capital Gains Tax rates of 10% at the basic rate and 20% at higher rates and closely aligns with pre-existing CGT rates for the sale of residential property. 

But how will these changes impact your savings? And what measures can you take to protect your investments? 

How Does Capital Gains Tax Work? 

Capital gains tax is a tax on the profit made when you sell an asset that’s increased in value. With this in mind, it’s the gain that you’ve made that incurs tax, as opposed to the total money received. 

This means that if you’ve made an investment of £7,000 which you later sold for £27,000, it will be your gain of £20,000 that’s subject to CGT. 

Some assets are also tax-free, so it’s important to know what you’re liable to pay tax for. As a rule of thumb, you’re likely to be required to pay capital gains tax on most personal possessions, (aside from your car) that are worth £6,000 or more, property that isn’t your main home, your main home if you’re letting it out or it’s used for business, any shares that aren’t kept in an ISA or PEP, or business assets. 

These are known as chargeable assets. However, other digital assets like cryptocurrency and Bitcoin could also be subject to capital gains tax. 

Individuals are also afforded a tax-free allowance. The current capital gains tax allowance for the tax year 2024 to 25 is £3,000, which marks a significant drop on the £6,000 from the year before. 

With this allowance in place, you’ll only be taxed on the profits made beyond this £3,000 threshold. 

How Will the CGT Hike Affect Me? 

Before the changes, capital gains tax accounted for £15 billion per year in Treasury funding, representing less than 2% of revenue. This revenue is raised from around 350,000 people in the UK. 

The new CGT tax rates came into place immediately on the 30th of October 2024, and this means that any gains you make on investments on or after this date will be liable for the 18% to 24% band depending on your tax rates. 

As an example, if your taxable income is £20,000 and your taxable gains are £12,600, you’ll need to deduct your Capital Gains tax-free allowance of £3,000 to leave £9,600 that qualifies for CGT. 

Combining this total with your taxable income leaves you with £29,600, which is less than the £37,700 higher tax band threshold, meaning you’ll pay the basic CGT rate of 18%. As a result, you’ll be liable to pay £1,728 in Capital Gains Tax. 

If these exact gains were made in the 2024/25 tax year before the new rates came into place on October 30th, you would pay just £960 in CGT. 

While it’s important to remember that Capital Gains Tax only applies to the profits you make from investments and that we’re talking about far greater numbers than many UK investors save annually, such a significant shift in CGT could have a big impact on your savings if you happen to have had a profitable year investing in stocks and shares, for instance. 

Stephen Millard, deputy director of the National Institute of Economic and Social Research, has warned that CGT rate hikes could deter more residents from saving. The prospect of earning less from investments could have a major impact on how UK households build their wealth. 

What Should I Do? 

Already, we’ve seen a significant rise in the volume of individuals opening ISAs as a means of bypassing CGT hikes. 

According to available data, a 39.6% rise in the number of investors maxing out their £20,000 ISA allowance for the current tax year has taken place ahead of the October 30th Autumn Budget. 

Furthermore, in September alone, a 47% increase in ISA subscriptions took place. This highlights how more individuals are seeking to take advantage of the tax-free qualities of ISAs in anticipation of higher CGT rates. 

If you’re keen to maximise your saving potential over the year ahead, opening an ISA is the best way to make profits that aren’t liable for capital gains tax, and this should be an essential consideration for anyone seeking to grow their wealth regardless of CGT rates. 

It’s important to keep in mind that CGT will only be taken from profits, and the scale of the threshold remains to be seen regarding the tax-free allowance for the year ahead. This means that for many savers and investors, capital gains tax won’t be a significant hindrance. 

Building Sustainable Savings

Don’t be put off from making investments and savings decisions in the wake of the Autumn Budget. Building a nest egg is still a rewarding way to grow your wealth and protect yourself against any future setbacks. 

Remember to utilise your ISA allowance of £20,000 as a priority to make sure you’re still making the best possible profit without having to worry about CGT. 

Although the Budget has left Capital Gains Tax rates higher for UK residents, it’s still possible to build your wealth sustainably using a variety of useful investment instruments. So relax and keep saving on your terms.