Changes to Dividend Tax

From 6 April this year the tax-free allowance for people who receive income from dividends will be cut from £5,000 to £2,000.

You will be affected if, for example, you receive dividends outside your individual savings account (ISA) allowance or pension.

If you are a basic-rate taxpayer you will pay 7.5%. Higher-rate taxpayers will pay 32.5% and the highest rate will be 38.1%. The Government estimates that 2.3 million people will pay more tax as a result of this change. The average additional tax bill is likely to be around £315 but, of course, many will pay more than this.

One option to avoid this additional tax bill is to transfer any dividend-paying shares that you hold into an ISA. However, this can’t be done directly. Your shares will need to be sold and bought back again inside your ISA. The process is known as ‘bed and ISA’ and costs are involved, so it’s important that you take good advice about the pros and cons of this approach.

For example, there will be dealing costs for the sale and Stamp Duty at 0.5%. If the sale value of your shares exceeds your annual allowance of £11,300 you could also be liable for Capital Gains Tax. If you are a lower rate taxpayer this will be 18% or 28% if you pay a higher rate of tax. There’s also a risk that you could sell your shares at a lower price than you can buy them back inside your ISA.

You could also consider moving your investments into pensions to take advantage of your £40,000 annual limit, depending on your current income. You might also be able to transfer assets to your wife or husband to put into an ISA or if they have an unused dividend allowance.

If you would like to know more, please contact your accountant.