Tax credit on dividend income
Dividends are currently paid with a 10% tax credit. For every £1,000 of dividend income received, it’s assumed that £111 in basic rate tax has already been paid, making the total dividend £1,111. From 6 April 2016, this tax credit will be scrapped.
From April 2016, all dividend income will be treated as gross and the rate of tax payable on dividends will depend on the investor’s other taxable income. Every investor will have a £5,000 tax-free dividend allowance as well as their personal allowance. Beyond this, the personal tax liability for taxpayers increases by 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate) compared to 2015/16.
So what does this mean for you?
Essentially it will make life better for many small investors seeking an income from their shareholding. However, you should know:
- whether your investment generates a yield (this
is the income generated by the underlying assets which may be paid to you or reinvested in the fund). - whether the yield is taxed as dividend or interest.
- how much that yield is.
Let’s look at two hypothetical examples:
Fund A has a yield of 4%, taxed as dividend. You can invest up to £125,000 in this fund, before triggering a tax liability on the income generated.
Fund B has a yield of 1% taxed as dividend. You can invest up to £500,000 in this fund, before triggering a tax liability on the income generated.
It is important to make the right investment fund choices to meet your own personal objectives and that includes minimising your tax liability. We can help you here.
1. Maximise your ISA and Pension investments – these are not subject to taxation on the yield generated by the fund.
2. For couples, make the most of each person’s £5,000 dividend income allowance by considering to split your investments.
3. Use the new personal savings allowance for other types of investment fund. In most cases, the income from xed interest funds and corporate bonds is subject to interest tax, not dividend tax. From April 2016, the rst £1,000 of interest income from these holdings will be free of income tax under the new personal savings allowance (£500 for higher rate taxpayers).
4. Consider deferring taxation using an Onshore or Offshore Investment Bond for part of your investments.
