WITH all the public outcry and media noise following the Chancellor’s proposed crackdown on self-employed National Insurance (which was subsequently dropped as a result) the raid on private investors’ dividends has largely been under-reported. The Chancellor’s proposal will cut the tax-free dividend allowance from £5,000 a year to just £2,000 from April 2018.
Although the change seems to be designed to reduce the incentives for people to incorporate themselves as companies for tax reasons, it will also hit savers with investments in stocks and shares worth more than around £50,000 outside ISAs (working on a four per cent dividend yield).
The £3,000 reduction in dividend shelter will cost basic rate payers £225 annually, £975 for higher rate payers and top earners £1,143 a year. With George Osborne having only introduced the allowance last April, this change potentially unleashes a wrecking ball on the retirement plans of many prudent investors, who have arranged their portfolios accordingly.
The good news is that the Government has given forward notice of the proposed change and provided tools for most investors to minimise the costs. With this in mind, it’s important to act now to review your investments and ensure they are held in the most tax efficient way. For instance, investors can make appropriate use of the more generous ISA allowances this year and in the years ahead, to shelter investments from the tax man. Dividend income earned inside an investment ISA is automatically tax free and any capital gains are also not subject to Capital Gains Tax. With the ISA allowance now £20k, investors who subscribe fully this year and subscribe a further £20k on 6 April 2018 can mitigate the effects of the new tax regime by shielding £40k per individual (£80k per couple) over the next 12 months.
If you are considering making changes, careful planning is required. The transfer of investments into an ISA will trigger the need to sell and buy back the holding, meaning you may crystallise gains, which will be potentially liable to Capital Gains Tax (if the gain is above your annual allowance), and there will be additional costs to consider in the form of the buying spread and stamp duty (0.5 per cent on main market shares). Even with these costs, for many, the savings made from the switch will be considerable over time.
If you would like to discuss your options with one of our team of Chartered Advisers or Investment Managers please contact Cave & Sons for a no-obligation initial discussion on 01604 621421 or email enquiries@caves.co.uk
The value of an investment and the income from it could go down as well as up. You may not get back what you invest.’
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at (12/04/2017). You are recommended to seek competent professional advice before taking any action.
Cave & Sons Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 143715.
