Chancellor driving savers into Isas

This article is part of
Guide to Spring Budget 2017

Chancellor driving savers into Isas

Those who followed the stockmarket as chancellor Philip Hammond delivered his Spring Budget would not have seen much in the way of moves.

The FTSE 100 remained broadly flat on 8 March but the pound fell to its lowest level against the dollar since January, down 0.5 per cent as his announcements failed to lift the currency out of its ongoing decline.

Richard Buxton, head of UK equities at Old Mutual Global Investors points out: “The market reaction in the immediate aftermath of the speech was muted. 

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“Gilt yields rose a tiny bit (in other words, prices fell), sterling weakened a little relative to other major currencies, and equity markets edged up slightly. It was all, unsurprisingly, very unremarkable.”

For investors, the biggest announcement from the Budget was the cut in the tax-free dividend allowance which is set to drop from £5,000 to £2,000 in April next year.

As Mr Hammond explained in his statement: “It allows each director/shareholder to take £5,000 of dividends out of their company tax free, over and above the personal allowance.

“It is also an extremely generous tax break for investors with substantial share portfolios.”

Tax wrappers

The chancellor suggested half the people affected by this reduction are directors/shareholders of private companies, while the rest are investors in shares with holdings worth typically over £50,000 outside Isas.

Tom Selby, senior analyst at AJ Bell, comments: “The annual dividend allowance has been put to the sword by Mr Hammond less than a year after his predecessor George Osborne introduced it.

“The cut from £5,000 to £2,000 in April 2018 will make it even more important that investors make full use of the tax allowances available through Isas and Sipps.”

He advises investors and advisers will need to think carefully about which investments they hold inside and outside of tax wrappers. 

“They will want to ensure that high dividend-paying investments are held within Isas and Sipps to minimise the impact of the dividend allowance cut.” 

For many in the industry, it was yet another sign the government is pushing more people into saving through an Isa product of some kind, having nearly doubled Isa limits since 2010.

The Lifetime Isa is also due to launch in April this year, adding to the range of tax-efficient wrappers available to clients.

Moving the goalposts

Ben Russon, vice president, portfolio manager in the Franklin UK equity team, agrees: “Clearly the reduction in the tax-free dividend allowance from £5,000 to £2,000 is an incremental negative for those investors that have sizable portfolios outside of tax-wrappers, and represents yet another example of the government continually shifting the goalposts with regards to the long-term savings industry.”

Les Cameron, head of technical at Prudential, adds: “The previous dividend allowance of £5,000 allowed investors to hold around £150,000 of equity-based portfolios tax free.