With the Dividend Allowance set to be cut from £5,000 to £2,000 from April 2018, we consider how investors can help to mitigate the impact of the change.
A brief overview
2016 saw significant changes to the rules on dividends, with the introduction of a new Dividend Allowance (DA) of £5,000 per annum, as well as an increase in the headline rates of tax. So how does it work?
The DA exists in addition to an individual’s Personal Allowance and savings allowances. It charges £5,000 of the dividend income at 0% tax – the dividend nil rate. Dividend income in excess of the DA is currently taxed at the following rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band.
However, just two years after the DA was introduced by his predecessor George Osborne, Chancellor Philip Hammond announced that it would be cut from £5,000 to £2,000, with effect from 6 April 2018.
With the planned reduction in the DA just around the corner, investors may want to consider strategies to help lessen the impact of the change. Here we outline some key points to consider, but do contact us for further advice.
Maximising the DA
Every individual is entitled to their own DA. If your investment portfolio is likely to exceed the amount that will be protected from income tax (approximately £67,000 in 2018/19), you might want to transfer some shares to your spouse or civil partner, thus spreading your investment to ensure that you utilise each person’s individual allowance.
Making the most of ISAs
The cut in the DA means tax-free ISAs are likely to play an increasingly important role in your investment strategy. The overall annual subscription limit for ISAs increased to £20,000 for 2017/18 (up from £15,240 in 2016/17). With funds in an ISA exempt from tax, it is important to utilise this allowance before the start of the new tax year.
If you think you will be affected by the cut in the DA, Equity ISAs should be one of the first things to consider. By investing the maximum £20,000 into an Equity ISA now, with a further £20,000 on 6 April 2018, protection can be given for £40,000 of a portfolio. For a married couple or civil partners, the combined figure doubles to £80,000.
Increasing pension contributions
If you have income from employment or self-employment, you may also effectively reduce your marginal rate of tax on dividends by increasing pension contributions and taking advantage of the available tax relief.
For taxpayers with adjusted net income above £100,000, maximising pension contributions may allow you to obtain relief at the effective rate of 60%. Pension contributions can be made at up to 100% of relevant earnings, subject to the annual allowance, which is currently £40,000. Those with threshold income above £110,000 may have their annual allowance tapered away to a minimum of £10,000. Any unused allowances may be carried forward for up to three years. This is a complex area so please speak to us for further advice.
We can help you plan to maximise your personal wealth and minimise the tax bill – please contact us for advice.