Spread the word about dividend taxation

This tax is effectively being revived as, from next April, investors receiving more than £5,000 from company dividends held outside Isas will pay more tax.

The IIS was introduced in 1973 on the principle that investment income was inherently less worthy than earned income. At the extreme, it implied that the reputed £185,000 per week (almost £10m a year) paid to Diego Costa for kicking a football was more worthy than the income of an entrepreneur who put his house on the line and worked hard creating employment and building a business, but found that any capital he created produced ‘unearned’ investment income which was liable to extra tax.

Given that the clients of financial advisers are more likely to be current or former hard-working business owners and entrepreneurs than millionaire footballers, this means that this reintroduction of a surcharge on investment income is bad news.

The abolition of IIS by the Thatcher government in 1983 was hailed as a victory for common sense, on the basis that capital creation through a culture of entrepreneurialism would create jobs and be good for the economy, and so it proved.

It is hard for an adviser today to appreciate that in the 1970s, the 83 per cent top tax rate (reached at about 4 times the average wage) had an extra 15 per cent IIS, bringing the top rate up to an eye-watering 98 per cent. I am not suggesting that we are on our way back to such punitive rates, however, I think every financial adviser should take careful note that the first ‘true blue’ Budget for 18 years has returned us to a tax regime which penalises investment income.

This ‘blue Budget’ has guaranteed that the next nine months are going to keep advisers exceptionally busy

This change will also seriously disadvantage the many advisers who draw dividends, rather than salary, from their own limited companies. Accountants regularly advise even very small IFA firms to form a limited company and pay themselves dividends to avoid national insurance costs. The Budget makes this a pointless exercise from 6 April 2016.

A cynic might say this change was inevitable once the practice of civil servants being remunerated through their personal limited companies was exposed. On the plus side, however, it should encourage more small and medium-sized advisory firms to convert to limited liability partnerships, which I have long felt combine all the benefits of personal taxation with the limited liability of a company, especially as we still seem to be a long way off a long-stop on liabilities.

In a nutshell, this ‘blue Budget’ has guaranteed that the next nine months are going to keep advisers exceptionally busy.

We need to alert clients to the implications of new dividend rules as well as the almost certain curtailment of tax relief on pension contributions. Whatever your view of this Budget’s longer-term implications for investors, the message of ‘act before 5 April 2016’ needs to be loudly and clearly delivered to clients.