Dividend allowance cut from £5,000 to £2,000
From 6 April, the tax-free dividend allowance will be cut from £5,000 to £2,000, this was introduced in the 2017 Budget.
The move will impact employees and directors of small businesses who pay themselves partly or wholly through dividends rather than a salary.
It could also impact investors with dividend generating shares and funds held outside of ISAs and pensions.
The government estimates around 2.27 million individuals will be affected with an average loss of £315. Currently, any dividend income above the £5,000 allowance is taxed at the following rates:
Basic rate taxpayer – 7.5%
Higher rate taxpayer – 32.5%
Additional rate taxpayers and trustees – 38.1%.
According to calculations by Hargreaves Lansdown, only those with around £140,000 or more in investments are hit with the taxes (assuming 3.5% yield). But once the dividend allowance falls to £2,000 in the new tax year, this could impact anyone with investments of around £55,000 or more outside a pension or ISA.
Below are a few ways to help you avoid the dividend tax
1) Take advantage of this year’s ISA allowance
Investments within ISAs aren’t subject to the dividend tax, so in the current 2017/18 tax year, you can move up to £20,000 of investments into ISA wrappers. You’ll need to use the Bed & ISA process. This involves selling stockmarket investments to crystalise gains – ensuring your gains fall within the annual capital gains tax allowance (£11,300 currently). The money can then be reinvested in the same assets within an ISA, to protect it from dividend and capital gains tax in future.
2) Take advantage of your ISA allowance on the first day of the new tax year
From 6 April 2018, you will have a new ISA allowance to take advantage of. At the very start of the new tax year – before you have earned any dividends – you can transfer another £20,000 into ISAs using the Bed & ISA process. In the new tax year, you will actually have a capital gains tax allowance of £11,700.
3) Use your spouse’s allowance
If you’re married and your spouse isn’t using their ISA allowances, you can give assets to them without generating any kind of tax charge. They can then put those assets into an ISA using the Bed & ISA process. This is known as Bed & Spouse & ISA. If they aren’t using their own dividend allowance, you could also give them assets generating dividends of up to £2,000. Using a combination of these three things, you can shelter £80,000 of investments in ISAs, and hold £110,000 outside an ISA while remaining within your tax-free dividend allowance.
4) Use your pension allowance
You can use a Bed & SIPP, which works similarly to a Bed & ISA, but you are sheltering investments in a pension instead of an ISA. It has the additional advantage of offering an immediate 20% tax relief