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.
Director, Financial Planning
T | +44 (0)20 7556 1353
E | firstname.lastname@example.org
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