As April 5 draws nearer, the combination of another tax year ending and the first Budget from a new chancellor has brought tax-efficient investing sharply into focus.
This year, however, it is mainly previous changes that are driving trends in this sector of the market.
Reductions in the pensions annual allowance have seen many investors and savers turning to venture capital trusts (VCTs) and enterprise investment schemes (EISs), in an attempt to maximise their tax planning.
For many, the 2017 spring Budget was something of a non-event: VCTs and EISs were left alone, pensions – compared with previous years – were for the most part untouched, and the government provided continued support for the Isa sector, with the annual limit set to rise as planned to £20,000 next month.
The only potential fly in the ointment for savers is the decision to reduce the tax-free dividend allowance from £5,000 to £2,000. While this will not come into effect until April 2018, it has highlighted the importance of a holistic tax-planning strategy.
Andrew Garstang, Lancaster branch manager for Hargreave Hale, says: “The reduction in the tax-free dividend allowance will now affect investors who own portfolios with values from £50,000. It now makes it more important to utilise Isa allowances, which will increase to £20,000 per year from April 2017.
“In practice, we are likely to see investors holding high income-producing equities in Isas and lower income-producing equities outside of an Isa, where they can focus on generating growth to make use of their individual Capital Gains Tax allowances.”
Katie Machin, chartered financial planner at Walker Crips, points out: “If the average annual dividend yield is 3.8 per cent, investors owning more than £55,000 in shares will pay more tax under the new rules. At the previous £5,000 allowance only those with more than £135,000 in shares would have been impacted.”
“Under the new rules, an investor with £5,000 of dividend income, paying a higher rate of tax, could expect a tax hit of approximately £1,000 of net income without any Isa planning,” she warns.
“An individual can shelter £35,240 of investments from future income or capital gains tax by using this and next year’s allowances. For a couple, this would increase to £70,480.”
But Trevor Simms, managing director at Birchwood Investment Management, points out the way in which dividends were taxed already changed in April 2016, increasing dividend tax rates by 7.5 per cent across the board and introducing the personal dividend allowance of £5,000.
“Investors need to be aware that the full impact of the existing changes will not be felt until January 2018, but when they do hit they could see a sizeable percentage of their dividend income cut,” he warns.
While most investors may feel they have escaped any drastic measures it is worth remembering there will be another Budget in the autumn.
Given Brexit negotiations may finally be under way by then, now could be the best time to take advantage of tax efficiencies while they are still available.