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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.
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.
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
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.
We see the Tax Return as a window into our client’s life and the best way for us to get to know each other very well. We aim to see that the right amount is paid at the right time on the basis of full, accurate and timely disclosure.
We assume a role somewhere between trusted advisor and knowledgeable friend – a role vital in ensuring clients are able to keep and enjoy more of what they earn and bequeath it to the next generation.
UK tax is constantly changing and you will have events that require tax planning (e.g. a possible investment into a business or sale of an asset) while also having ideas of how you would like to use your wealth to benefit you and your family (e.g. via gifts or the creation of trusts).
We aim to ensure that you make the most of the tax legislation, while being cautious and reasonable in our approach to tax planning.
Foreign domiciled UK residents have access to some very beneficial tax rules but those benefits come with complexity, which is ever increasing. We help those who are yet to come to the UK, are already here or those who have left to ensure that they make the most of the available rules.
For anyone outside the UK who owns UK real estate (including non-UK companies), we help them with their ongoing tax compliance and any related tax planning.
If you’re a US citizen living in the UK or you’re planning to move here, there will be a number of important life stages that you will need to plan for. Our dual-qualified US and UK tax experts have an intricate understanding of both systems. Tell us your story and together we’ll assess your liabilities and tackle any issues before they become an issue.
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