Government reintroduces plan to cut dividend tax break

Around 90,000 UK investors will be caught out as the Government reintroduces its dividend tax plan said Darren Cornish, customer experience director at The Share Centre.

Government reintroduces plan to cut dividend tax break

Around 90,000 investors using dividends to fund their retirement could be hit by a reduction in the dividend tax allowance, when new legislation comes into effect in April 2018.

The Government is reintroducing its plan to reduce the tax-free allowance on dividend income from £5,000 to £2,000. This measure was first announced in the Spring Budget but then removed from the pre-election finance bill. However the Treasury has now confirmed that it will be included in new legislation being tabled “as soon as possible after the summer recess”. The reduction in tax-free dividend allowance will be effective from April 2018.

In The Share Centre’s pre-election survey of 1,000 of its customers, when asked what action the new Government should take to support personal investors, over half (53%) said it should protect dividend tax allowance.

This measure, like the proposed increase in Class 4 National Insurance which was subsequently scrapped, was intended to level the playing field between the employed and the self-employed. However, an unintended consequence is that it also hits those who are using dividends to fund their retirement.

A significant number of our customers have portfolios over £50,000 that are not being held within a tax efficient wrapper such as an ISA. These are not company directors paying themselves through dividends – many are pensioners who turned to investing because interest rates were so low. They could see their tax liability increase by hundreds or possibly thousands when the allowance is reduced. Taken across the industry as a whole we estimate there are around 90,000 investors in this position.

Within the past six months the Government has announced, withdrawn and then re-confirmed its intention to cap the dividend tax allowance. This lack of certainty can be very unhelpful for investors looking to plan appropriately. It is an issue which is high on their agenda, with over half the investors we surveyed before the election saying the new government should protect dividend tax allowance.

Many will now be looking at their portfolios to see how they can minimise the impact of the change when it comes in next April. One thing they may wish to consider is selling their investments and repurchasing them within an ISA, sometimes known as ‘Bed and ISA’. Investors need to be aware that they may need to pay stamp duty, if applicable, and that their repurchased holding will be slightly smaller due to the ‘sell’ price being lower than the ‘buy’ price. However once investors have made this switch they have the peace of mind of knowing that their future dividend income as well as any capital gain is tax free.

 

Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest and tax policies may change. 

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