Loading…

Dividend allowance + CGT allowance = .

The taxation of dividends was changed from 6 April 2016, primarily to prevent people reducing their tax bill by setting up a company, paying Corporation Tax on profits and then taking income as dividends.

About the author

Matthew Hodge

+44 (0)20 7556 1353
hodgem@buzzacott.co.uk

The reforms abolished the old 10% tax credit on dividends and introduced the dividend allowance, whereby the first £5,000 of dividend income is tax free.

This change has potentially been disadvantageous for individuals who:

Are able to pay themselves dividends in place of wages;

Have significant dividend income; and

Have previously avoided the tax charge up until now (basic rate taxpayers).

Further changes in the 2017 Budget reduced the £5,000 tax-free allowance to £2,000 from April 2018.

The changes can, however, benefit some particularly higher or additional rate taxpayers with dividend income from investments.

Show me some examples…

Currently, a higher rate taxpayer with a £200,000 portfolio of equity funds with an average yield of 2.5% a year can now receive all their dividend income (£5,000) without a tax charge. Previously, they would have paid 22.5% of the gross dividend or £1,125 in tax. On dividend income above £5,000

(£2,000 from the 2018/19 tax year), higher rate taxpayers pay tax at 32.5% and additional rate taxpayers pay 38.1%.

For an investor with a £200,000 equity fund portfolio, and assuming capital growth of 5% a year, the investor can also take advantage of their Capital Gains Tax (CGT) annual exempt amount (£11,100 for 2016/17 tax year) to re-base their portfolio or withdraw the gains (£10,000). By combining the CGT annual exempt amount and the dividend allowance, an investor effectively has a £200,000 ‘tax-free’ portfolio.

This amount reduces to £80,000(assuming a 2.5% dividend yield) from the 2018/19 tax year when the allowance decreases from £5,000 to £2,000. Notwithstanding this, it will remain useful for those having already fully utilised tax-efficient ISA or pension allowances.

Got some questions?

For further information, please contact Buzzacott’s Financial Planning team.  

Matt Hodge

Director, Financial Planning

T | +44 (0)20 7556 1353

E | hodgem@buzzacott.co.uk

 

This article was taken from the Spring issue of the Professional Practices Group Newsletter. To download a PDF version of the full newsletter please click below.

Professional Practices Group Newsletter

You might also be interested in… Tax planning and advice for individuals.

Design your own financial future

Work with us to look over each aspect of your financial life (and your family’s) and build a map of your income and assets. Together we’ll identify ways to minimise what goes out and build up what comes in. That includes your liability for income, capital gains and inheritance taxes, as well as your eligibility for rebates or deferred payment.

Non-doms

If you’re a non-dom living and/or trading in the UK, our team can help you navigate each authority that applies to you. Should you ever run into problems with HMRC, our familiarity with your circumstances means you’ll have a go-between you can trust to help you resolve them.

US personal tax advice

US taxpayers living in the UK need to juggle two balls with one hand, always considering both sets of legislation before making any financial or personal decisions. Which, let’s be honest, could make even the most financially-savvy person feel cross-eyed. Have a chat with our dual-qualified US tax experts to ensure those balls stay airborne.

Consider us a combination of trusted advisor and informed ally.  We have your best interests at heart.