With the government on a mission to raise more income from taxes, understanding the full impact of fiscal changes on investments has arguably never been so critical. One area that has been subject to particularly sharp reductions is the Dividend Allowance, with changes likely to have a significant impact on many investors.
Six-year reduction
The annual tax-free Dividend Allowance was introduced in 2016/17 and originally stood at £5,000. In 2018/19, it was reduced to £2,000 and then halved to £1,000 from the start of the current tax year. This figure is set to halve again next April to stand at £500 – representing a 90% reduction in the value of the allowance in just six years.
Investor implications
An investor becomes liable for Income Tax on dividends after they’ve used their annual allowance, with the rate payable based on the Income Tax band they fall into. These changes will therefore inevitably increase the tax pressure on any individuals who own significant dividend-paying stocks or rely on dividends as a source of income.
What are the alternatives?
The Dividend Allowance is just one of the tax-free allowances UK investors can utilise. It may be beneficial for dividend-heavy investors to explore alternative options that offer exemption from dividend tax on qualifying shares, such as Individual Savings Accounts (ISAs). ISAs also benefit in being free of Capital Gains Tax. Another option could be to consider equities that prioritise long-term capital growth over dividend payments.
It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.