Budget Update: Dividend Dilemma

One of the surprises in the recent budget was the news that basic rate taxpayers will pay a new tax on dividends and those in higher rate tax brackets would pay more.

At the moment, dividends paid to basic rate tax payers are treated as if they have already been taxed through corporation tax on the company’s profits, so there is no further tax to pay. Under the new rules, which come into force from 6 April 2016, only the first £5,000 per year will remain exempt.

If you have a significant shareholding, or have concentrated on high dividend paying stocks, this may no longer be the most tax efficient method of generating an income. Maybe an “income“ can be generated by drawing on capital, or growth, on a regular basis? This is a strategy we use for many of our clients to avoid concentration risk to higher yielding stocks, but also to take advantage of the annual capital gains tax allowance of £11,100 per person per annum. Using this approach tax free “income“ can be generated between couples of up to £22,200 per annum.

When reviewing portfolios, apathy can be an enemy and we would always suggest making the most of ISAs, even if income or capital gains falls within your tax free allowances. It’s best to do these while you can, as this budget has demonstrated rules can change without warning. 

If you would like any information on how these, or any other changes mentioned in the budget, may affect you please get in touch. 

PS. Just in case you missed it we were again featured in the Financial Times Wealth Manager Survey and came top for performance over three years, from all the firms who chose to have their performance independently checked. You can read more details on the 2015 survey in our blog here.