Don’t be caught by the reduction in dividend allowance

From 6 April 2018 the dividend allowance is reducing from £5,000 to £2,000.  This means that where it has been possible to receive dividends of up to £5,000 a year tax-free, tax will be payable on all dividend income over £2,000 a year starting from next tax year.  The cost to doctors of tax on £3,000 of dividends that were previously tax-free is up to £1,143.

 

Extra tax

Basic rate taxpayer (7.5% tax on dividends)

£225

Higher rate taxpayer (32.5% tax on dividends)

£975

Additional rate taxpayer (38.1% tax on dividends)

£1,143

 This, however, assumes that no action is taken to plan for the dividend allowance reduction.  In fact, there are several ways to reduce or avoid the extra tax.  It bears stating that doctors shouldn’t assume this will only affect large portfolios.  Assuming a 4% yield, those with investments of £50,000+ will be affected and should review their position.  Tax-planning options include:

1. Moving investments into ISAs and pensions

ISAs and pensions are tax shelters within which dividends are received tax-free.  The amount that can be moved into ISAs and pensions each tax year is limited.  The ISA allowance is £20,000 and the annual allowance for pensions is £40,000, although the pension annual allowance reduces for those earning £150,000+ or who have already taken flexible pension benefits (seek further guidance if affected).  Note these allowances include contributions made by others on your behalf, e.g. employer pension contributions count towards the pension annual allowance as does pension accrued in the NHS Pension Scheme.  Be aware that once within a pension, investments cannot be accessed until age 55 (rising to 57 by 2028).

2. Adjusting the type of investments

For investments that remain outside of ISAs and pensions, dividend-yielding stocks could be switched to interest-producing or growth stocks where it otherwise suits your investment strategy and attitude to risk.

3. Transferring between spouses

Where one spouse is using their full allowance but the other is not, investments could be transferred between spouses to make use of both allowances.

4. Consider an investment bond

Within an investment bond, dividends are not liable to personal taxation so do not count towards the dividend allowance.  Investment gains are instead taxed as income when the bond is encashed.  Whether there is an overall tax saving will therefore depend on individual circumstances.

Please note that the value of tax benefits depends on individual circumstances and tax rules are subject to change by the government.  Nothing in this article should be considered personalised advice.  For tax-planning advice please contact Richard Higgs CFP FPFS on 0117 966 5699 or richard.higgs@wealthwestmedical.co.uk.

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