5th March 2018
The dividend tax regime was introduced in April 2016. Since then, if you have no other income, you can earn up to £16,000 in dividends (£5,000 dividend allowance plus £11,000 personal allowance) and pay no tax. Above this you have to pay dividend tax, which is 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
The cut being introduced in April means shareholders will be worse off by £225, £975 or £1,143 a year, depending on whether they pay tax at the basic, higher or additional rate. For a couple who share the running of their company, this is doubled to £450, £1,950 or £2,286, depending on their tax rate.
It is thought that this will affect around 2.27 million people, half of which the Treasury estimates will be savers with investments in stocks and shares, outside of ISAs. Seven per cent will be pensioners who have taken advantage of the pension freedoms and used their retirement pots to invest.
There are ways you can beat the dividend tax changes and, even with the tax year-end fast approaching, there is still time to take full advantage of your ISA allowance, which, at £20,000, is the highest it has ever been.
With returns free of income and capital gains tax, ISAs are one of the most tax-efficient and flexible ways you can save for the future and really make the most of your money. Within an ISA wrapper, all dividend growth is tax free. So if you have all your stock market-based investments within an ISA, you don’t need to worry. The same goes for anyone who receives less than £2,000 a year in dividends from investments not held within an ISA.
The Treasury says: “The first step for anyone who might be affected is to make sure they are putting as much as they can in ISAs and pensions. Not only that, it makes sense to ensure that their higher dividend-paying investments are moved into these products, before investments that are more focused on capital growth. This will ensure they can minimise the cut to the dividend allowance as much as possible.
“Investors should, therefore, continue to use tax-efficient accounts such as the ISA for their savings and investments, to ensure that tax payable on any income or gains is minimised”.
If you’d like to discuss the tax-efficient opportunities of ISAs, or any other aspect of your wealth management, please get in touch with us on 01934 875919 or click here to book an appointment online