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Preparing for the reduced dividend allowance

20th September 2017

Preparing for the reduced dividend allowance

In the 2017 Spring Budget, the Chancellor announced that the tax-free dividend allowance would be cut from £5,000 to £2,000 from April 2018. This gives investors just over six months to decide how to manage their dividends to reduce their tax burden.

Those receiving dividends with a value of more than £2,000 will be required to declare that income to HMRC and the dividends will be taxed.

This change applies to those receiving dividends from investments and to those who take a dividend from their own business.

What can you do? If you are an investor holding dividend-paying stocks you should:

Revisit your stocks – you can move high-earning dividend stocks into an ISA, which gives your dividends a tax-free wrapper, and leave lower-earning dividends alone because they will fall inside the £2,000 allowance. If you’re considering an ISA, contact us for advice, as selling stock and reinvesting the proceeds could incur other tax liabilities.

Share the shares – the £2,000 allowance is a personal one, so you might benefit from transferring some of your shareholdings to a spouse, allowing you both to make use of the allowance.

Think about SIPPS – you can invest up to £40,000 in a SIPP and benefit from tax relief. Again, there are potential tax liabilities depending on how you approach this, so get some advice.

Change your investments – unless you are completely tied to dividend-producing stocks, think about changing your investment criteria so that your investments are still sound, but not producing high dividends.

If you are a shareholding investor or director in a business, it’s likely that you were delighted by the previous Chancellor, George Osborne, introducing the £5,000 dividend allowance. In just two years, that allowance has been cut dramatically.

The best way to prepare for the coming dividend allowance change is to talk to Wise & Co. We can advise business owners and private investors on the best way to organise their income from dividends and how you can take your salary from your company; making your earnings as tax-efficient as possible.

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