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Dividend Income Tax Reduction
Since the scrapping of indexation and taper relief in 2008, which were complicated ways of incorporating some inflation protection when calculating taxable capital gains on shares, the Government seems each year to have been almost unable to resist tinkering with the way tax is applied to investments.~~Two years ago dividends came into scrutiny through the removal of the dividend tax credit. A £5,000 tax free allowance was introduced to help offset the higher tax burden placed on investors, but this balance has proven short lived. As with the lower rate of tax that accompanied the abolition of indexation and taper relief, the allowance on dividend income will fall to just £2,000 in the next tax year.~~What does this mean? Basic-rate taxpayers currently receiving £5,000 of dividends each year will pay an additional £225 in tax on dividend income next year, whilst higher-rate taxpayers with the same level of income will pay £975. On £100,000 invested, this is a 1% increase in “cost”, and not an investor-friendly move.~~What can investors do? We have always been active in utilising clients’ annual ISA subscriptions, and suggest with the increase in the subscription to £20,000, this is fully taken advantage of wherever possible. Other than that there is little to be done that does not involve more complex advice, which is not something we would post on our website. Therefore, we encourage clients to use ISAs as far as possible, and would welcome any questions you may have on the subject of dividend tax, ISAs and recent tax changes.
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