Forthcoming tax changes mean thinking strategically about how to protect your income
April sees changes to dividend taxation that make it even more important for investors to make full use of tax-efficient shelters to create and protect wealth.
The short-lived Dividend Allowance, introduced in April 2016 by then-Chancellor George Osborne, was intended to encourage people to invest by making the first £5,000 of dividend income earned by shareholders each year tax free.
In March 2017, however, Osborne's successor Philip Hammond announced plans to cut the tax-free dividend to £2,000 as of April this year. Hopes that the allowance would remain unchanged rose when it was omitted from the Finance Bill last May, but since then the government has confirmed that it will be reduced.
Dividends above the £2,000 threshold will be taxed at 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for top earners.
The biggest losers are expected to be business owners who pay themselves dividends as a more tax-efficient alternative to a salary, but it is also likely to leave some private investors worse off.
That includes those who are using dividends to help fund their retirement, or pensioners who turned to investing in equities because interest rates are so low.
So what can investors do to minimise their liability
Tony Müdd of St James's Place Wealth Management, said: "Making the maximum possible use of tax-efficient wrappers is a basic step, but the best line of defence against this tax change. Investors with substantial holdings outside of ISAs and pensions should consider moving them to these tax shelters."
Assuming a dividend yield of 3.5 per cent, investors with portfolios worth around £50,000 should still pay no tax on the income generated if they follow this guidance. As a result, a couple could still hold a significant sum in non-ISA and pensions without that sum being subject to tax.
Making the maximum possible use of ISAs is an obvious starting point but there are other way to take advantage of tax allowances and exemptions to consider:
*The personal tax allowance of £11,500 can also cover dividend income if other income sources add up to less than that amount
* Assets can be passed between spouses without restriction, which enables full use of both partners' personal allowance, Capital Gains Tax allowance and reduced dividend allowance.
*Generating income as interest rather than dividends through, for example, bond funds, which might fall within the tax-free personal savings allowance for interest payments.
Tony Müdd added: "There is no doubt that building up funds within ISAs and pensions is the surest way to minimise tax liabilities and mitigate the impact of further tax changes.
"This change underlines the importance of reviewing your personal finances on a regular basis to ensure they are arranged as tax-efficiently as possible. The end of the tax year presents an ideal, and in some cases, final opportunity to check that you are making the best possible use of exemptions and allowances."
Professional financial advice will help you protect your wealth in the light of these changes. Smith Eliot Financial Management (ad ops please link to http://www.smitheliotfinancialmanagement.co.uk) has offices in Stamford and Oakham, contact the firm on 01572 759759 for further details.
Smith Eliot Financial Management Ltd represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group's wealth management products and services, more details of which are set out on the group's website at www.sjp.co.uk/products.