As the dust settles on part of a major social care overhaul that will see dividend tax increase by 1.25 percentage points from next April, interactive investor, the UK’s second largest DIY investment platform, looks at options on the table for investors who want to mitigate some of the downside.
Currently dividends above the £2,000 threshold are taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.
From next April basic-rate taxpayers will pay 8.75%, higher-rate taxpayers 33.75%, and additional-rate taxpayers 39.35% on dividends above £2,000.
Kyle Caldwell, Collectives Editor, interactive investor, says: “The government said the change, which was a surprise announcement, will raise £600 million in extra revenue.
“Based on a yield of 3%, it requires a portfolio of £66,667 to generate £2,000 of dividend income. With a 4% yield, this figure drops to £50,000, and with a 5% yield it falls to £40,000.
“The good news is that the dividend tax can be avoided by using an ISA. At present the annual allowance is £20,000 and £9,000 for a Junior ISA.
“In addition, the personal allowance of £12,570 may also cover dividend income if your other income sources are worth less than that sum.
“Investors with substantial holdings outside ISAs should consider moving them into the wrapper. The transfer, however, will involve selling and buying back shares, which could trigger a capital gains tax (CGT) bill. The CGT annual allowance is £12,300. The process known as ‘bed and ISA’ is a straightforward way to fund your ISA using your existing investments.
“Self-invested personal pensions are also beneficial, in that dividends are tax-free within the wrapper. But bear in mind withdrawals that exceed the 25% tax-free allowance will be taxed as income. To sum up, tax shelters are investors’ best line of defence.”