How to avoid being caught out by the higher tax on dividends
It’s hard to imagine Chancellor Philip Hammond’s proposed changes to National Insurance for the self-employed going down any worse than they did last month, with the government’s decision to do a u-turn on the hike within a week of announcing it demonstrating just how unpopular the proposals were. However, private investors also suffered in the Spring Budget, with the consequences of changes affecting them and which have not been scrapped, receiving far less coverage in the media.
The proposed change would see the tax-free dividend allowance reduced to £2,000 from April 2018, down from the current figure of £5,000. The move was intended to impact wealthy directors of companies and small businesses, as well as achieving greater equality between employed and self-employed workers, as the latter often work through their own companies and pay themselves through dividends as opposed to taking a salary.
However, after conducting research into the potential impact of the changes, the Share Centre has found that up to 90,000 investors will experience a reduced annual income next year. Many are pensioners, who depend upon their dividend income in order to pay their monthly bills.
As it seems unlikely that the Chancellor will scrap a second tax announcement from his budget, investors will need to find a way of reducing the impact of these changes upon their income. One way of doing this is through sheltering some of your investment income through an ISA allowance.
Whilst there are costs involved in transferring investments from share accounts to some ISAs, the dividend income earned within an investment ISA automatically has tax-free status. So, whilst you may end up paying out to move your invested savings initially, once your investment has been moved, you can feel secure in the knowledge that any future dividend income is protected from further taxation.