The chancellor announced reforms to the taxation of dividends by replacing dividend tax credits with a dividend tax allowance of £5,000.
New dividend tax rates will be introduced, with effect from April 2016, of 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for additional rate taxpayers.
Chris Williams, chief executive of online investment adviser Wealth Horizon, says the introduction of a tax-free dividend under £5,000 will help the large majority of investors.
He says it will ensure that ordinary savers with smaller portfolios or who are planning to start building a nest egg for the first time will see the opportunity for greater returns. However, he warns not all investors will benefit.
Mr Williams says: “Those that have been in the enviable position of already establishing a large portfolio will see their returns take a larger hit.
“For the government however, this may be a small price to pay for what will hopefully result in an overall increase of investment into the UK economy.”
Richard Stone, chief executive of The Share Centre, says 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, he says with a FTSE 100 tracker fund currently yielding about 3.4 per cent 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, Mr Stone says 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 per cent for each tax rate band will penalise investors with larger portfolios who are driving income from their savings, Mr Stone notes.
He says the government expects this measure to raise £6.8bn from the change to the treatment of dividends over the next five years.
In terms of potential action that advisers must take, Angela Murfitt, Chartered financial planner at Fairstone Financial Management, points out individuals who are remunerated by way of dividends will now need to consider whether this shape of remuneration is still the most tax efficient.
