Dividend tax & Investing for income

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Dividend tax & Investing for income

By Cleona Lira 29th July, 2015

Guess what? I made it to a radio show where the conversation focused around investing for income, dividend tax and dividends. This was with Share Radio, a brand new radio station designed to help you through the money maze. Last I had ever spoken on radio was at the age of 7. I was super nervous and so I kept my answers short & sweet.

It was a great experience, the people at Share Radio were lovely and I am glad I said yes even though I was terrified of being asked questions 'live'. Mind you, this is no different than when my clients ask me questions during interviews, reminded my dear hubby and as I thought of it that way, it did make sense.

Click on this pod cast link if you care to hear.

A few more words on dividend tax:

The Chancellor, George Osborne, called the current dividend tax regime a 'very complex and archaic system'.

The current system (the complex & archaic one):

Those receiving dividends benefit from a 10% tax credit. This is because the company you are investing in for a dividend has already paid corporation tax to the government – the credit is to partly offset double taxation. The key thing to remember is that this is a notional credit – you don’t pay tax and then receive the credit, the credit simply serves to reduce your tax bill to:

  • 0% for basic rate tax payers,

  • 25% for those paying the 40p higher rate of income tax and

  • 30.6% for those paying the additional 45p income tax rate.

The new system (simpler, we all think):

The dividend tax credit will be replaced with a new tax-free allowance of £5,000 – this means anyone who receives dividends won’t pay tax up to this amount. Thereafter, they will be taxed as follows:

  • 7.5% for basic rate (20p) taxpayers

  • 32.5% for higher rate (40p) taxpayers

  • 38.1% for additional rate (45p) taxpayers

What does it mean for you?

As the Chancellor pointed out in his Summer Budget speech delivered on 8th July 2015: “those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax.”

According to the Chancellor the change, coupled with the new personal allowance (£11,000) and our new personal savings allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers) means that from April 2016 – on top of the New ISA – you will be able to receive up to £17,000 of income a year tax free. This is pretty great news to those relying on an income in retirement.

Not so great news for  limited company freelancers, contractors and small businesses who use the low salary and dividend strategy of profit extraction (or, in fact simply take any dividends from their company). Generally, going forward, incorporation will be more about the non tax benefits.

How can I financially plan better for this?

  • If you have a spouse it is more important than ever to consider if there are income splitting opportunities;look to spread taxable portfolios between yourselves to make the most of each of your dividend allowances, personal allowances and basic rate tax bands.

  • Look at holding your investments within tax efficient wrappers such as ISAs and SIPPs. If you have any holdings outside of these vehicles, consider transferring them.

  • It makes sense to hold your investments which pay the highest yields in an ISA, to make your new annual dividend allowance go further.

  • Make the most of your annual allowances - £15,240 for ISAs and £40,000 for all pension savers except the UK’s top earners.

  • Also remember that if you missed any pension contributions for the past three years these can be carried forward.

  • Finally, if you expect to move from a higher rate taxpayer to a lower rate taxpayer, which is often the case when you retire, it’s worth looking into deferring your dividend payments until when lower rates of tax will be paid.