experts are warning that as many as 90,000 wealthy retired investors could lose significant amounts of money because they are not holding their investments in tax-efficient wrappers.
The warning follows Chancellor Phillip Hammond’s grab for revenue from investors by slicing 60% off the £5,000 tax-free dividend allowance.
The measure was announced in Budget 2017, reducing the dividend allowance to £2,000 from April 6, 2018.
The aim was to remove a tax perk for the self-employed who incorporated into a one-man company, but the unintended consequence impacts thousands of other investors.
“A significant number of our customers have portfolios over £50,000 that are not being held within a tax efficient wrapper such as an ISA. These are not company directors paying themselves through dividends. Many are pensioners who turned to investing because interest rates were so low,” said Darren Cornish of The Share Centre.
What the dividend tax change means
“They could see their tax liability increase by hundreds or possibly thousands when the allowance is reduced next year. Taken across the industry as a whole we estimate there are around 90,000 investors in this position.”
Cornish explained that a £50,000 portfolio generating a 4% a year dividend income would account for the £2,000 tax-free allowance.
Before April 2018, investors can set off dividends of £5,000 produced from a £125,000 portfolio with a 4% yield.
If they want to move their shares into a tax-efficient wrapper, such as an ISA, the annual allowance is £15,240 for 2016-17, rising to £20,000 next year, leaving £39,760 producing a taxable income of £1,590 a year.
Bed and ISA
Switching shares from a personal holding by ‘bed and ISA’, but this may mean selling cheaper than the buy price, trigger stamp duty and sale commission.
The tax-free dividend allowance was only introduced in April 2016 by former Tory Chancellor George Osborne.
Basic rate income tax is paid on dividends of more than £2,000 at 7.5%. Higher rate taxpayers pay at 32.5% and additional rate taxpayers at 38.1%.
“Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive over the £2,000 allowance,” said a government spokesman.