Cash grab: Increase in dividend taxes will hit the income of many families that depend on division to supplement their finances
Shareholder dividends of UK listed companies are in bounce-back mode after the end of lockdown restrictions and a recovery in the economy.
But the government’s latest tax attack on dividend income has somewhat dampened the chances of better earnings from stocks in the months and years to come.
As part of measures to boost the National Health Service announced this month, an increase in dividend taxes will eat away at the income of many families that rely on regular splits to supplement their finances.
It goes into effect at the start of the new tax year in April.
Moira O’Neill, head of personal finance at Wealth Manager Interactive Investor, describes the government’s grab as ‘poorly-timed taxes and the bereaved widow left with a pile of stock certificates’.
She says it would be over 55 — the largest holders of dividend-friendly companies like AstraZeneca, BP and GlaxoSmith-Kline — who would take the biggest hit.
The impact of these changes has been analyzed by AJ Bell, Wealth Manager for Wealth.
Not only has it looked at the negative impact of higher tax rates starting April 6 next year, but it has also determined the cumulative cost of the tax change in dividends – and the reduction in the annual tax-free dividend allowance – since April 2016. Starting tax year.
It doesn’t make for a pleasant read. Once the latest changes roll in from April next year, the tax laundered from dividend income will increase by more than 80 percent in some cases, with the basic rate hurting taxpayers the most.
For the tax year beginning April 2016, investors enjoyed an annual dividend tax-free allowance of £5,000.
This meant that all dividend payments below this amount were further protected from tax—and yet amounts above that could still be tax-exempt if an investor had any remaining personal allowance available (a the amount of income the person would receive without paying tax on it).
On dividends above £5,000 – and assuming no available personal allowance – the tax rate varies depending on whether an investor was a basic, higher or additional rate taxpayer. The rates were 7.5 percent, 32.5 percent and 38.1 percent, respectively.
In April 2019, tax rates remained the same, but the annual dividend allowance was reduced to £2,000.
From April next year, the allowance remains the same, but the tax rates go up to 8.75 per cent, 33.75 per cent and 39.35 per cent, respectively.
AJ Bell has calculated (see table) that a basic rate taxpayer with £10,000 annual dividend income would have to pay £375 of tax on this amount in the tax year beginning April 2016, up from £10,000 in April 2019. reached 600.
In the next tax year, the tax bill will rise again to £700 – an 87 percent increase since the 2016 tax year. For higher and additional rate taxpayers, the respective increases are 66 and 65 percent.
Laura Suter, personal finance head at AJ Bell, says many investors are now facing a ‘double tax squeeze’ on their dividend income.
It’s a tax hit that Tom O’Brien, financial planner at Wealth Manager Brevin Dolphin, says investors shouldn’t underestimate.
‘Usually, the change is announced as an increase of 1.25 per cent, but in reality it is a tax increase of 16.67 per cent.’
Wealth manager Tilney Smith & Williamson’s Jason Hollands is ‘disappointed’ to see rising taxes on dividends.
“We need to encourage long-term investment in the UK if we want a dynamic economy to thrive,” he says.
Still, he says, many investors can avoid these higher taxes by moving shares or funds into wrappers like issa and pension — where dividend taxes don’t apply.
This process is called ‘Bed and Isa’ or ‘Bed and Pension’, but there are costs involved and capital gains tax may be payable.
Married couple and civil partner can also switch shares and funds between each other to avail two sets of dividend allowances.
These are called ‘mutual transfers’ – and can be easily arranged by the money manager or broker.