Under shelter

Changes to dividend taxation in April make it even more important that investors make full use of tax-efficient shelters to create and protect wealth.

The allowance was introduced to encourage people to invest by making the first £5,000 of dividend income earned by shareholders each year tax-free.

But in March last year, as part of a wide-ranging attack on the self-employed, his successor, Philip Hammond, announced plans to cut the tax-free dividend allowance to £2,000, as of 6 April this year.

Dividends above the £2,000 threshold will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for top earners.

The biggest losers will be business owners who pay themselves dividends as a more tax-efficient alternative to salary. The measure, like the proposed increase to Class 4 National Insurance (which was subsequently scrapped) was designed to level the playing field between the employed and self-employed.

Take shelter

There is no doubt that building up funds within ISAs and pensions is the surest way to minimise tax liabilities, and to mitigate the impact of further tax changes.

Making the maximum possible use of this year’s ISA allowance of £20,000 is an obvious starting point; but taking advantage of other tax allowances and exemptions can also make a big difference.

The personal tax allowance of £11,500 can also cover dividend income, if other income sources add up to less than that amount.

Assets can be passed between spouses without restriction, which enables full use of both partners’ personal allowance, CGT allowance and reduced dividend allowance.

It might be possible to generate income as interest rather than as dividends; for example, from bond funds, which might then fall within the tax-free Personal Savings Allowance for interest payments.

Speak to me to find out more and to ensure you are reviewing your personal finances on a regular basis and making the best possible use of exemptions and allowances.

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