Dividend tax is wake-up call for investors

A FUNDAMENTAL change to the taxation of dividends comes into effect from April 6 this year. With recent focus very much on pension reform, this issue has been rather neglected.

“The new rules will require investors to review their investment portfolios,” says John Cole of Paterson Financial Planning. “This could be particularly pertinent for those holding investments outside of tax-favoured investment wrappers such as a pension or individual savings account (ISA),

“A tax-free dividend allowance of £5,000 will replace the current 10 per cent dividend tax credit. This means anyone receiving dividends will have a £5,000 tax-free allowance regardless of the level of their non-dividend income. Dividends above this level will be taxable and the new rates will apply to the actual dividend received by an investor as there will no longer be any requirement to ‘gross-up’ the dividend.

“The new dividend allowance won’t reduce total income for tax purposes but it will mean that no tax is due on the first £5,000 of dividend income received. Dividends within the £5,000 allowance count towards basic or higher rate tax bands and may affect tax paid on dividends received above the allowance.

“A review of the structure of investment portfolios will be essential in light of the new rules. The choice of investment ‘tax wrapper’, asset allocation and the distribution status of any collective investment funds will be necessary to ensure maximum tax efficiency. An independent financial adviser (IFA) can marry the tax rules with your invested assets and circumstances to add real value to the investment process.

“You may receive various types of income from a UK authorised collective investment fund such as interest, dividends and property income distributions. Interest is paid from funds invested in gilts, bonds, money market instruments or deposits. Dividends are paid from funds invested in shares. Property income distributions are paid by authorised investment funds, primarily from rental income. All these incomes are potentially taxable.

“Investors are increasingly adopting a portfolio strategy incorporating a multi-asset approach managed by fund managers. It will be essential to consider the approach of your investment manager and the investment mix.

“Each investment fund will be classed as a ‘dividend’ or ‘interest’ distributor, meaning a review may be necessary to ensure full advantage is being taken of the new tax allowance.”

Contact John Cole, Paterson Financial Planning Ltd on 0141 221 0033.