Yesterday's Budget included a significant shake up of the way dividends are taxed. Instead of the current tax credit, from next April investors will receive a £5,000 allowance after which dividends will be taxed at 7.5 per cent, 32.5 per cent, or 38.1 per cent depending on their income tax band.
Isa and pension tax relief will continue unchanged.
While chancellor George Osborne said this would mean 85 per cent of investors get a reduction in the amount of dividend tax they pay, investors with a portfolio of more than around £140,000 will see an increase.
Danny Cox, chartered financial planner at IFA Hargreaves Lansdown, said investors should “navigate their way around the new rules carefully to avoid tax rises”.
“Apathy is the investor’s enemy and people should fully use their tax shelters such as an Isa, even if they think their income or gains will currently fall within tax-free allowances,” he added. “You just never know when things might change in the future so it’s best to bank your tax breaks while you still can.”
The financial adviser has a number of top tips to ensure investors don't pay more than they need to. They include:
1. Use the allowance in full; if you're married make use of each individual's allowance.
2. Make the most of tax bands – if you're married, make sure taxable dividends are paid in the name of the spouse who pays the lowest tax rates.
3. Don't forget your Isa
4. Or your Sipp
5. Be clever with yield: Keep your funds and shares with a greater yield in an Isa or Sipp to maximise the dividend income tax allowance.
6. Use the new personal savings allowance (£1,000 a year or £500 for higher rate taxpayers) for corporate bonds
7. Reduce other income. HL says “perhaps by transferring income bearing assets such as cash deposits to a lower earning spouse, or deferring withdrawals from a drawdown pension until a new tax year”.
8. Use your pension to save dividend tax
“Effectively the basic rate tax band is increased by the amount of the pension contribution, meaning larger gains might be realised before the higher rate of dividend tax is payable,” the adviser says.
9. Invest in VCTs for tax-free dividends.
10. Defer taxation using an offshore investment bond: investors only pay tax when profits are withdrawn.