Winter 2017

Planning for the dividend allowance cut

At present, individuals pay no tax on the first £5,000 of dividends they receive, under rules introduced in April 2016. Dividend income above £5,000 is taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. These rates remain unchanged.

The £3,000 cut in the allowance will leave shareholders who receive more than £2,000 of dividends worse off by up to an annual £225 (basic rate), £975 (higher rate) or £1,143 (additional rate) depending on their income. Those likely to be hardest hit are director/ shareholders who take remuneration from their company mainly in the form of dividends. For a couple who share the running of their company, the ‘loss’ in the figures above is doubled to £450, £1,950 or £2,286 depending on their tax rate.

Dividends remain advantageous compared with salary for basic rate taxpayers because of the lower income tax rate – 7.5% rather than 20% – and the employee’s national insurance contributions (NICs) of 12% and employer’s NICs of 13.8% on salary or a bonus. If you pay tax at the higher or additional rate, however, the effective rate of tax on dividends is only about 3.6% below that on salary, taking NICs into account as well.

Company owners who have not made full use of the £5,000 dividend allowance in 2017/18 should make up the difference by 5 April 2018, if they are in a position to do so. Remember that a company can only pay a dividend if it has enough reserves to cover the payment.

Also adversely affected by the cut in the dividend allowance will be anyone who relies on income from their investment portfolio to supplement their earnings or, in many cases, their pension. If you currently receive more than £2,000 in dividends, you might benefit from switching to investments that give capital growth rather than income.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

In this issue:

Steady ahead – the second Budget  of 2017

Refresh your New Year resolutions

Time to update your life insurance?

Asset allocation in a world of rising inflation

Investing for children – not just for Christmas

Planning for long term care