Dividend tax-take
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Nearly 3.6 million taxpayers are expected to be facing a tax charge on dividend income for 2024/25; double the number just three years ago. The allowance is now just £500, but there are various ways of avoiding this dividend tax cost, although not all will be appropriate for every investor.
The dividend allowance has been in HMRC’s sights for the past three years. It was previously set at £2,000, but it was reduced to £1,000 for 2023/24, and to £500 from 2024/25 onwards. This latest reduction has had the biggest impact on basic-rate taxpayers. Just under 700,000 basic-rate taxpayers paid tax on dividend income for 2022/23, but this number will hit nearly 1.7 million for the current tax year.
If you have a modest share portfolio of just over £10,000 yielding 5% it will now use up the £500 dividend allowance, leaving you with a tax liability HMRC needs to know about.
At the same time as the dividend allowance has been cut, the level of dividend payouts by companies has generally recovered to pre-Covid-19 levels.
Opting for script dividends will make the outcome more onerous. These are still taxable despite no cash being received, so tax will have to be funded from other sources. The same goes for accumulation funds where dividends are reinvested automatically.
If dividend income exceeds the £500 allowance, mitigating steps that can be taken might include:
Investors need to be careful, however, that decisions are not made just to save tax. Never lose sight of the importance of overall investment return and maintaining a balanced portfolio.
Please contact us to discuss.