90,000 UK investors set to be caught out by Hammond’s new tax on dividends

Darren Cornish, Director of Customer Experience at The Share Centre, said: “The Tax Free Dividend Allowance was originally set at £5,000 to support the self-employed operating through their own companies. The new threshold of £2,000, coming into effect in April 2018, is therefore part of the measures to level the playing field between the employed and the self-employed – alongside the proposed increase in Class 4 National Insurance which has now been scrapped.

“However, an unintended consequence of the change to the Tax Free Dividend Allowance could be that it penalises those who are using dividends to fund their retirement. A significant number of our customers have portfolios over £50,000 that are not being held within a tax efficient wrapper such as an ISA. These are not company directors paying themselves through dividends – many are pensioners who turned to investing because interest rates were so low. They could see their tax liability increase by hundreds or possibly thousands when the allowance is reduced next year. Taken across the industry as a whole we estimate there are around 90,000 investors in this position.”

Under measures announced in the Budget, the Tax Free Dividend Allowance will be reduced from £5,000 to £2,000 from April 2018. This will typically affect investors with portfolios over £50,000 (assuming a 4% yield, a portfolio size of £50,000 would generate dividend income of £2,000). However, investors can shield themselves from the impact of the reduced dividend allowance by transferring their investments from a share account to a tax-efficient wrapper such as an ISA. Currently £15,240 per tax year can be held within an ISA, rising to £20,000 from 6 April 2017, and will be shielded from Capital Gains Tax and income tax on profits.

Cornish added: “We are contacting all our customers who are likely to be affected by the reduction in the Tax Free Dividend Allowance next year to let them know their options. One thing they may wish to consider is selling their investments and repurchasing them within an ISA, sometimes known as ‘Bed and ISA’. We only charge dealing commission on the sale, although investors need to be aware that they may need to pay stamp duty, if applicable, and that their repurchased holding will be slightly smaller due to the ‘sell’ price being lower than the ‘buy’ price. However once investors have made this switch they have the peace of mind of knowing that their future dividend income is protected.”