Are You Prepared for the 2018 Dividend Tax Grab?



Posted on: 9th November 2017

Next year, April 2018, the government will be slashing the tax free dividend allowance. Here are some of the steps you take to mitigate this tax grab.

April 2018 Tax Grab

In April next year there is going to be a reduction in the tax-free dividend allowance. The government is doing nothing more than making a tax grab, as the tax free allowance is planning to be cut from £5,000 to £2,000.

This halves the amount investors can receive in dividends before paying any tax. It will hit business owners hard and, sadly, among those hardest hit will be small business owners who pay themselves by dividends.

However, it will also affect investors, especially those who are retired, who depend heavily on income from shares or funds.

Tax Grab Implications

For basic-rate taxpayers, who have dividends of £5,000, there will be an extra £225 in tax to pay at 7.5%. Higher-rate taxpayers with the same dividends will pay £975 in tax at 32.5%, and additional rate taxpayers £1,143 in tax at 38.1%, on the lost allowance.

It is no small sum. But there are ways that your financial advisors can help you to mitigate the effects of the coming changes.

1. Where possible, ensure your investments are held in joint names

Switching investments into joint names can help prevent you paying excess tax. For example, a retired couple with £100,000 invested in a UK equity income collective investment fund, receiving £4,000 a year income distributions, would currently be paying no dividend tax, under the existing arrangement. After April, however, additional tax of up to £762 could be due if the investment remained in one name. Reviewed and transferred the investment into joint names would mean that a 50:50 split would occur, halving the tax liability.

2. Make use of ISAs pensions and other “Exempt Wrappers”

Equity investments held in an ISA, pension or venture capital trust are exempt from dividend taxation. Maximise these wherever possible will mean less tax to be paid.

A couple can invest £40,000 in a UK equity income collective investment fund, using a stocks and shares ISA this tax year and, at a distribution yield of 4%, receive £1,600 a year tax-free. This amounts to a saving of £120 to £610 each year. The additional bonus is that you can invest into each ISA every year after that, increasing the tax-saving.

3. Split investments/income between you and your spouse

Splitting income and investments allows you to hold specific proportions of investment. It doesn’t have to be a 50:50 split, the proportion should be the most beneficial outcome for you. Doing this, you can then use any dividend allowance and lower marginal dividend tax rates.

In this situation, a couple with £200,000 of jointly held UK equity shares and collective investment funds receiving £8,000 a year income distributions, may both have their dividend allowance available from 6 April 2018. But if one is a higher-rate taxpayer and the other a basic-rate taxpayer, it would be worth splitting the investment 25:75 in favour of the basic-rate taxpayer. By doing this, the dividend tax on the excess over their allowances is only taxed at 7.5% and not 32.5% – a saving of £500 each year.

4. Balancing investments taxed as dividends and interest

Many people have a mixture of investments. Some will be taxed as dividend income and some as savings income. These should be reviewed to make sure that both the dividend and personal savings allowances are being used to provide up to £6,000 a year each of tax-free income this tax year.

Personal savings allowances are £1,000 a year  for basic-rate taxpayer and £500 (higher-rate taxpayer each. For a corporate bond collective investment fund with a distribution yield of 4%, this is the equivalent of an investment of up to £50,000 per basic-rate taxpaying couple tax-free.

5. Use Investment Bonds to shelter Equity Investments

If you have fully used your dividend and other allowances, or if you are the trustee of a discretionary trust that do not receive them, tax-deferred investment bonds are a favourable option for UK equity investments. Specifically (and in the light of recent events) onshore bonds.These work, because dividend income received by onshore investment bond life funds is exempt from corporation tax and capital gains benefit from indexation relief. This means the overall tax paid by a UK equity life fund could be substantially lower than the basic-rate taxpayer credit given.

For those who are higher-rate taxpayers, investing in a UK equity fund via an onshore investment bond, has no ongoing tax liability. If you are a basic-rate taxpayer, they pay no further tax on encashment.

Talk to the Tax Experts

Dividend taxation is complicated and business owners small and large need professional advice from qualified, chartered advisers. Talk to our Chartered Advisors at Haven IFA to help make sure you minimise tax and maximise returns.

Posted in Tax