Around 90,000 UK investors are set to be adversely affected by the change to the tax free dividend allowance announced in the Budget earlier this month.
Chancellor Philip Hammond cut the dividend tax allowance from £5,000 to £2,000, coming into effect in April 2018, as part of his effort to level the playing field between the employed and the self-employed.
The Share Centre has warned that the lower tax free dividend allowance could have the unintended consequence of penalising those who have bought shares with their retirement savings as an alternative to low interest rates on cash.
Those who do not hold these shares in a tax-efficient wrapper could see their tax bill increase dramatically, and The Share Centre has estimated that around 90,000 UK investors could be hit.
Darren Cornish, director of customer experience at The Share Centre, encouraged investors to consider selling their investments and then repurchasing them within an Isa, though this could incur stamp duty or could result in a slightly smaller holding if the price they sell the shares at is lower than when they buy them back.
“However once investors have made this switch they have the peace of mind of knowing that their future dividend income is protected,” Mr Cornish said.
The tax free dividend allowance cut will typically affect investors with portfolios of over £50,000, which would generate dividend income of £2,000 assuming a 4 per cent yield.
Currently £15,240 per tax year can be held in an Isa, rising to £20,000 from 6 April and will be shielded from capital gains tax and income tax on profits.
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said that 90,000 may be an under estimate because some investors may not have used their full Isa allowance.
“I consider the future knock on affect in coming years will be even higher and in any case this constant tinkering of taxes and allowances is not welcome,” Mr Roy-Chowdhury said.
Ben Faulkner, head of communications at EQ Investors, said that the wealth manager will be following up with clients to highlight the change and has encouraged them to use the full extent of their Isa allowance.
“Whilst an unintended consequence, the reduction in the tax-free dividend allowance, again highlights why the first step should always be to fill your Isa and consider a Sipp.”
julia.faurschou@ft.com
