Dividend taxation was reformed in April 2016 and is being adjusted again in April 2018. Some doctors who currently pay no tax on dividends will have tax to pay from 6 April 2018 and those already paying tax on dividends will have to pay more. In this article we look at ways of investing tax-efficiently to reduce the effect of the upcoming changes.
Under the rules introduced in April 2016, dividends of up to £5,000 a year can be received free of tax. This is the ‘dividend allowance’. In April 2018, the dividend allowance is being reduced from £5,000 to £2,000.
This will affect all doctors receiving £2,000 or more income from shares or funds that pay dividends; this is roughly equivalent to the income produced by an investment portfolio of around £50,000 (assuming a 4% yield).
Tax on dividends in excess of the allowance is 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
For those affected, options for minimising tax on dividends after 6 April 2018 include:
Dividends are always tax-free in an ISA. In the next few weeks it is possible to move investments worth up to £40,000 into an ISA: £20,000 before 6 April 2018 and £20,000 from 6 April 2018 onwards. This could give you an extra £1,600 tax-free dividend income in addition to the £2,000 dividend allowance (assuming a 4% yield).
Couples will be able to move up to £80,000 jointly into ISAs over the next few weeks (£20,000 each before 6 April 2018 and £20,000 each afterwards), potentially doubling your tax-free income from the £1,600 quoted above to £3,200.
For investments outside ISAs you could consider holding these jointly or distributing them between you to use both of your dividend allowances. This could give you an extra £2,000 tax-free income compared to having the investments all in one person’s name.
Note transfers between spouses and civil partners are free from Capital Gains Tax and Inheritance Tax. This is not the case for other couples.
Depending on your circumstances, how long you want to invest your money for and your attitude to investment risk, other tax-efficient accounts may be suitable.
Pensions offer tax-free dividend income and also income tax relief on contributions but cannot be accessed until retirement age (currently 55, rising to 57 in 2028). Doctors with NHS Pensions will also need to be mindful of the Annual Allowance for pension contributions. This is £40,000 but is reduced for high earners (earning £150,000+). Both personal pensions and the NHS Pension count towards this allowance and a charge applies on any excess.
Venture Capital Trusts (VCTs) offer tax-free dividends and income tax relief but are higher risk investments and must be held for at least five years to retain the tax benefits.
The tax treatment of investment bonds depends on whether they are held onshore or offshore. The main advantage is being able to defer some or all of the tax liability on your investments until the bond is encashed.
Please note the value of tax benefits depends on individual circumstances and tax rules are subject to change by the government. This article does not constitute personalised financial advice. If you have a portfolio of £50,000 or more, or are considering investing an amount of this size, we suggest taking independent financial advice to ensure you invest tax-efficiently. To discuss this further please contact Richard Higgs CFP FPFS on 0117 966 5699 or firstname.lastname@example.org.
Dividend Allowance Reduction: How to Avoid Paying Tax on Dividends