£5,000 dividend allowance aims to simplify system

8th July 2015

The Chancellor has announced a £5,000 tax-free dividend allowance, above which dividends will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Danny Cox, Chartered Financial Planner, Hargreaves Lansdown says: “The unexpected change in dividend tax policy is a clear vindication of making sure you use your ISA allowance each year, even if you are a basic rate taxpayer. Those hardest hit by this policy will be wealthier investors on high incomes who haven’t protected their portfolios in a tax shelter. Everyone should review their investments in light of the new dividend tax rates and make sure as much of their portfolio is protected from tax as possible.”

Richard Stone, chief executive of the Share Centre says: “The changes to the dividend tax credit system are to be welcomed for those with more modest portfolios. For basic rate taxpaying investors with modest portfolios this will make no difference to the tax they pay, it will simplify the system and in some cases – for example for higher-rate taxpayers with modest investment portfolios – personal investors will pay less tax. By way of example, with a FTSE 100 tracker fund currently yielding c.3.4% this would enable an investor to invest £147,000 and then receive the dividend income on that investment tax free.

“However, for higher-rate tax payers, or those with more substantial portfolios this will be a potentially painful tax increase. The increase in the effective tax rate on dividends above the £5,000 allowance of 7.5% for each tax rate band will penalise investors with larger portfolios who are driving income from their savings. The government expects this measure to raise £6.8bn over the next 5 years which is a tax on those investors.”

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