You are here: Home - Investing - Experienced Investor - News -

Be wary of the £90,000 dividend tax trap

0
Written by:
19/02/2019
The value of shares you can hold outside an Isa before paying dividend tax has shrunk from £135,000 to £46,500, finds new research from Hargreaves Lansdown.

In April last year, the dividend allowance fell from £5,000 to £2,000. Assuming a dividend yield of 4.3% (the current yield on the FTSE All Share ex Investment Companies), this shrinks the amount you can hold outside an ISA or pension without facing dividend tax by £90,000.

The best way to avoid paying tax on dividends is to hold shares in an Isa. For dividends on shares held outside an Isa, basic rate taxpayers are taxed at 7.5% on the excess, higher rate taxpayers at 32.5% and additional rate taxpayers at 38.1%.

Rising dividends yields or further cuts in the allowance could see investors facing dividend tax in future. Where possible, says Hargreaves, it is worth trying to channel as much of your savings as possible into a tax sheltered product. Investors can use the Bed & ISA process – whereby they sell shares they own and buy them back within an Isa wrapper – to protect £20,000 of existing investments from tax this year.

When doing this, you should prioritise those shares with the highest dividends. This will leave more growth-oriented investments outside the tax wrappers.

Sarah Coles, personal finance analyst, Hargreaves Lansdown, said: “The stock market has seen an income bonanza. In 2018, the total paid out in dividends hit a record high. In more recent months, dividends have remained fairly resilient, and as share prices backed off from the highs of last spring, the dividend yield has risen to around 4.3%.

“Record dividends are great news for investors, who can boost their investments significantly by reinvesting them, or withdraw more income without eroding their money. Sadly there’s a tax-shaped fly in the ointment, because higher dividends can mean shock tax bills.”

 

 

 

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Autumn Statement: Everything you need to know at a glance

Yesterday Chancellor Jeremy Hunt made his first fiscal statement in the role, outlining a range of tax measure...

End of Help to Buy: 10 alternatives for first-time buyers

The deadline for Help to Buy Equity Loan applications passed on 31 October. If you’re a first-time buyer who...

Moving to an energy prepayment meter: Everything you need to know

As households struggle with the soaring cost of energy, tens of thousands of billpayers are expected to move o...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week