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  • FIRST POST
    • talexuser
    • By talexuser 8th Mar 17, 1:38 PM
    • 2,169Posts
    • 1,645Thanks
    talexuser
    Reduction of Dividend Allowance?
    • #1
    • 8th Mar 17, 1:38 PM
    Reduction of Dividend Allowance? 8th Mar 17 at 1:38 PM
    I just saw a headline of a reduction in the shareholder dividend allowance from £5000 to £2000? Presumably this applies to everyone and is unravelling Osborne's policy after only one year?

    Ho Hum, I just bought my first unwrapped ITs last April designed for dividends of just below 5k.
Page 4
    • masonic
    • By masonic 10th Mar 17, 11:21 AM
    • 9,107 Posts
    • 6,237 Thanks
    masonic
    Much of the discussion misses the point of having the tax-free dividend allowance, which was introduced when the dividend tax credit was removed. The rationale for the tax credit (and before that advanced corporation tax) was to avoid double taxation (the firm pays corporation tax on profits that are then distributed to shareholders who pay tax on the dividends). The government bragging about the low rate of corporation tax is laughable with this double taxation. It is an absurd way to solve the problem that some people used limited companies to avoid income tax. The solution would be to raise the rate of corporation tax and bring back the dividend tax credit thereby reducing the incentive to use limited companies to avoid income tax and avoiding double taxation.
    Originally posted by Economic
    We can't do that because we're bribing businesses not to abandon us in the run up to us leaving the EU.
    • taylornj
    • By taylornj 10th Mar 17, 11:30 AM
    • 141 Posts
    • 68 Thanks
    taylornj
    They will be able to earn £2000 of dividends tax free. Before the original change they paid tax on all of their unwrapped dividend income. Only those with a very large dividend income (>£26.7k) will be worse off owing to the slightly higher rate of tax in force now.
    Originally posted by masonic
    A number I've seen posting I disagree with this is my understanding how share dividend taxes used to be. So you need to work through my examples to tell me where I'm going wrong....

    I'm a little distrusting of the things presented in budgets and like to run through by own figures to see the effects. Guess I just struggle with maths and tax, so please point out the mistakes.

    There is no >£26.7k I can't see how you got to this £26.7k figure, do expand I just can't see it.

    Before in April 2014/15 tax year.

    £90 was paid out as a share dividend. There was an artificial tax credit of £10 to make the dividend payment look like £100 with 10% tax deducted. Only Higher rate only would pay extra tax, non tax payers and basic rate tax payers would still receive the full £90 just the tax man pretends you received £10 more.

    Only if close to the borderline the fictitious 10% added could push someone into the higher tax band. That's getting to complex, so assuming not being pushed between tax bands.

    So £10k of dividends for a basic rate tax payer, is £10k. With no actual tax deducted just a fictitious 10% added and then deducted. You still get £10k but takes up £11,111,11 of your tax band.

    In this tax year.

    The same £90 is paid out. For basic rate tax payers, once £5000 is reached they pay 7.5% in tax or £6.75 result in not £90 as before but £83.25.

    On £10k of share dividends as non-tax payer, or all would be below the personal allowance so £10k is received. For basic rate tax payers the first £5000 is free of any additional tax, the next £5000 is taxed at the additional 7.5%, which is £375. That means instead of the £10k received in previous tax years, basic rate tax payers only receives £9625.

    From April 2018 that same £10k, will have £600 in tax deducted as they go over the £2000 allowance, so will receive £9400.

    When the tax credit system was scrapped, it's wasn't scrapping any actual tax on non-tax payer or basic rate tax payers. Share dividends where only ever taxed extra for higher rate tax payers, unless you count the fact that share dividends are paid out of company profits so have had corporation tax deducted.

    From April 2018 onwards any basic rate tax payer receiving more than £2000 of share dividends or basic rate tax payer currently receiving more than £5000 of share dividends is worse off than in the tax years up to 2015/16. The first 10% tax credit was just an imaginary tax not an actual tax

    Before

    Where
    N = Nett after tax
    D = Dividend payments
    I = Nett from tax income excluding dividends.
    d = Dividend with 10% tax credit
    t = tax credit

    d = D + t
    D = d - t

    N = D + I is the same as
    replacing D with fictitious d - t
    N = d - t + I

    You can pretend D = £1 and t was £100000 of tax credit then d could be £100001 makes no difference to the N in my pocket, unless considering the higher rate tax bands where d + I is used.

    Now current tax year
    Nc = D + I if D<= £5000
    Nc = D + I - (D-5000) x 7.5% if D > £5000

    Nc = N - (D -5000) x 7.5
    so
    Nc < N if D > £5000


    After 2018
    Na = D + I if D<= £2000
    Na = D + I - (D-2000) x 7.5% if D > £2000
    Na = N - (D-2000) x 7.5%

    so have

    Na < Nc < N if D > £5000
    Na < Nc = N if D > £2000 and D <= £5000
    Na = Nc = N if D <= £2000

    There is no £26.7k, £5000 and above or £2000 and above seem to be worse off for basic rate tax payers.
    • masonic
    • By masonic 10th Mar 17, 11:58 AM
    • 9,107 Posts
    • 6,237 Thanks
    masonic
    A number I've seen posting I disagree with this is my understanding how share dividend taxes used to be. So you need to work through my examples to tell me where I'm going wrong....

    I'm a little distrusting of the things presented in budgets and like to run through by own figures to see the effects. Guess I just struggle with maths and tax, so please point out the mistakes.

    There is no >£26.7k I can't see how you got to this £26.7k figure, do expand I just can't see it.

    <snip overcomplicated text and figures>
    Originally posted by taylornj
    I think you've missed the point that I was talking about higher rate taxpayers. But there was an error in my figures because I mistakenly used the £2k a 'tax saved' figure instead of a 'tax free' figure. The actual threshold is £8.65k.

    £8.65k of dividends (higher rate taxpayer, post-April 2018)
    £2k tax free = £0 tax
    £6.65k taxed at 32.5% = £2.16k tax

    £8.65k of dividends (higher rate taxpayer, pre-April 2016)
    £8.65k taxed at an effective rate of 25% = £2.16k tax

    Below £8.65k of dividends, higher rate taxpayers get more benefit from the £2k tax free amount vs the 7.5% increase in the dividend tax rate.

    Dividend tax rates
    Effective pre-April 2016 dividend tax rates

    As I stated above, basic rate taxpayers are worse off at dividend income above £2k under the new rules (because they used to pay 0% tax and now pay 7.5% tax). Therefore, this two-step change benefits most higher rate taxpayers at the expense of those basic rate taxpayers with more than £2k of unwrapped dividend income.
    Last edited by masonic; 10-03-2017 at 12:07 PM.
    • GooeyBlob
    • By GooeyBlob 10th Mar 17, 4:30 PM
    • 162 Posts
    • 218 Thanks
    GooeyBlob
    I have approx 50K in FTSE 350 companies which earn about 2.5K per year and about 15K in VCTs. While a basic rate taxpayer, serious thrift means my wages and income from other sources (including share dividends) will likely ensure I get close to maxing out my ISA this year. So the new rule means I'll have to reduce my FTSE 350 holdings over the next year or so and invest in a few more secondhand VCTs, buy stocks with lower dividends and perhaps use more of my virtually untouched CGT allowance instead.

    I was wondering about buying shares in the odd REIT though; would the dividend from a company such as (for example) British Land count towards the 2K dividend allowance?
    Saved many thousands of pounds over the past decade by brewing my own booze.
    • Economic
    • By Economic 10th Mar 17, 5:02 PM
    • 45 Posts
    • 34 Thanks
    Economic
    Not if it is a property income distribution (PID):
    http://www.britishland.com/investors/dividends/reits-dividends-and-uk-tax
    • masonic
    • By masonic 10th Mar 17, 5:26 PM
    • 9,107 Posts
    • 6,237 Thanks
    masonic
    I have approx 50K in FTSE 350 companies which earn about 2.5K per year and about 15K in VCTs. While a basic rate taxpayer, serious thrift means my wages and income from other sources (including share dividends) will likely ensure I get close to maxing out my ISA this year. So the new rule means I'll have to reduce my FTSE 350 holdings over the next year or so and invest in a few more secondhand VCTs, buy stocks with lower dividends and perhaps use more of my virtually untouched CGT allowance instead.
    Originally posted by GooeyBlob
    Presumably you've already picked the investments that will serve you best. Is paying 7.5% tax on a small fraction of your dividend income so abhorrent that you'll buy inferior investments to avoid it?
    • badger09
    • By badger09 10th Mar 17, 5:55 PM
    • 4,711 Posts
    • 3,898 Thanks
    badger09
    Presumably you've already picked the investments that will serve you best. Is paying 7.5% tax on a small fraction of your dividend income so abhorrent that you'll buy inferior investments to avoid it?
    Originally posted by masonic
    That was my thought. Tax tail wagging the investment dog
    • jimjames
    • By jimjames 10th Mar 17, 6:02 PM
    • 11,698 Posts
    • 10,010 Thanks
    jimjames
    I have approx 50K in FTSE 350 companies which earn about 2.5K per year and about 15K in VCTs. While a basic rate taxpayer, serious thrift means my wages and income from other sources (including share dividends) will likely ensure I get close to maxing out my ISA this year.
    Originally posted by GooeyBlob
    So as of April you can put £20k of shares inside an ISA again. Move the ones that pay the highest income and you'll be back below the £2k limit as you'd then only have £30k remaining outside. Repeat next year and you'll be down to £10k plus any new investments.
    Remember the saying: if it looks too good to be true it almost certainly is.
    • bowlhead99
    • By bowlhead99 10th Mar 17, 6:11 PM
    • 6,198 Posts
    • 10,924 Thanks
    bowlhead99
    Not if it is a property income distribution (PID):
    http://www.britishland.com/investors/dividends/reits-dividends-and-uk-tax
    Originally posted by Economic
    True, most REITS will pay out PIDs as well as 'normal' dividends. The thought that "PIDs won't use up your precious allowance so maybe you should buy some" is of course a false economy -because if the allowance can't be used on them, you'll be paying tax on them

    Assets producing PIDs and interest distributions are best held in an ISA (or pension) because of the dividend allowance not covering those categories.

    So as of April you can put £20k of shares inside an ISA again. Move the ones that pay the highest income and you'll be back below the £2k limit as you'd then only have £30k remaining outside. Repeat next year and you'll be down to £10k plus any new investments.
    Originally posted by jimjames
    One alternate approach is to move the ones that pay the lowest income and offer potentially highest growth into the ISA... which sounds silly because you're trying to shelter those dividends from tax... but by growing the total size of the ISA pot you can then flexibly fit more 'stuff' into it later (swapping out high growth stuff for high income stuff). Of course if the economy crashes later this year the size of the ISA will contract rather than grow, but then in a big depression you'll probably be getting fewer dividends anyway so you still achieved the objective of avoiding dividend tax
    Last edited by bowlhead99; 10-03-2017 at 6:17 PM.
    • Glen Clark
    • By Glen Clark 10th Mar 17, 6:26 PM
    • 3,634 Posts
    • 2,647 Thanks
    Glen Clark
    The solution would be to raise the rate of corporation tax and bring back the dividend tax credit thereby reducing the incentive to use limited companies to avoid income tax and avoiding double taxation.
    Originally posted by Economic
    Unfortunately politicians prefer many smaller taxes rather than fewer bigger ones, so people don't realize how much they all add up to.
    I think it was Sir Geoffrey Howe that came up with the wheeze of reducing income tax and replacing it with stealth taxes, others have just continued with it - like Osborne's Insurance Premium Tax
    For society to function well, people generally need to feel that they have a fair chance of success through their ability and efforts. The more entrenched hereditary elites we have, the less likely people are to feel that way
    • AnotherJoe
    • By AnotherJoe 10th Mar 17, 7:58 PM
    • 6,071 Posts
    • 6,400 Thanks
    AnotherJoe
    No. Itr depends on your definition of 'very wealthy' because that is what you said.
    Now you are backtracking and changing 'very wealthy' to just 'wealthy' which says it all
    Originally posted by Glen Clark
    Ok I'm happy to stand by very wealthy and add ultra wealthy in the spectrum of wealthiness
    • C_Mababejive
    • By C_Mababejive 10th Mar 17, 9:16 PM
    • 10,099 Posts
    • 9,219 Thanks
    C_Mababejive
    How long will ISA's be safe ??
    Feudal Britain needs land reform. 70% of the land is "owned" by 1 % of the population and at least 50% is unregistered (inherited by landed gentry). Thats why your slave box costs so much..
    • Apodemus
    • By Apodemus 10th Mar 17, 9:24 PM
    • 581 Posts
    • 408 Thanks
    Apodemus
    Interesting one. Most platforms do not charge you extra for opening an ISA (e.g. those that charge a percentage fee). However I know some like Alliance Trust do charge an annual fee per account..
    Originally posted by Malthusian
    Except that since my holdings are currently held as paper certificates, I will incur annual fees which which I am not paying at present.

    I agree, though, that it is unwise to let the tax-tail wag the investment dog.
    • bowlhead99
    • By bowlhead99 10th Mar 17, 10:44 PM
    • 6,198 Posts
    • 10,924 Thanks
    bowlhead99
    Except that since my holdings are currently held as paper certificates, I will incur annual fees which which I am not paying at present.

    I agree, though, that it is unwise to let the tax-tail wag the investment dog.
    Originally posted by Apodemus
    As an example, execution-only broker X-O (http://www.x-o.co.uk/isa-information.htm) will give you an ISA wrapper with a simple nominee service for UK shares / ITs / ETFs for free, hoping to make money out of you at £6 a trade when you decide to do some buying or selling.

    Other more full-service firms like TD Direct Investing (https://www.tddirectinvesting.co.uk/rates-and-charges) have some nominal annual admin fee on their ISA but waive it if you have a balance of over £5100 or you have set up the account to do at least some 'regular investing' into shares or funds by direct debit. I haven't paid ISA admin fees there for the last decade and it is cheaper and less hassle than trading off a paper certificate if I wanted to sell something.
    • Dird
    • By Dird 11th Mar 17, 10:33 AM
    • 2,577 Posts
    • 1,520 Thanks
    Dird
    How long will ISA's be safe ??
    Originally posted by C_Mababejive
    Hopefully for a long time otherwise everyone will be scrambling to change from ACC to INC
    Mortgage (Nov 15): £79,950 | Cashback sites: £826 | Current accounts: 15
    Mortgage (Mar 17): £75,516 | £30k in 2016: £30,300 (101%) | £25k in 2017: £6,030 (24%)
    • GooeyBlob
    • By GooeyBlob 11th Mar 17, 5:22 PM
    • 162 Posts
    • 218 Thanks
    GooeyBlob
    Thanks folks. Point taken about the tail wagging the dog.

    As I say, I'll be unable to move a lot of my current investments into an ISA unless I start recklessly spending my disposable income, big-hat-no-cattle-style, which won't be happening. Will have to see how much is left of my ISA allowance towards the end of the next tax year, might be a few grand.

    Nice to know about REITs; should I decide to look at one with a view to growth I know I don't have to worry about the PID too much.

    VCTs while racy are fantastic for income so investing a few K in one or two more will be a good place to start. Trouble is, they only generate more income to put in an ISA making the task of moving existing investments a little harder...
    Saved many thousands of pounds over the past decade by brewing my own booze.
    • polymaff
    • By polymaff 11th Mar 17, 6:01 PM
    • 1,532 Posts
    • 660 Thanks
    polymaff
    The majority of people in this country would consider it only fair that the burden of taxation is more equitable......
    Originally posted by Thrugelmir
    The people in this country want to see others paying more tax.
    • bowlhead99
    • By bowlhead99 11th Mar 17, 6:19 PM
    • 6,198 Posts
    • 10,924 Thanks
    bowlhead99
    VCTs while racy are fantastic for income so investing a few K in one or two more will be a good place to start. Trouble is, they only generate more income to put in an ISA making the task of moving existing investments a little harder...
    Originally posted by GooeyBlob
    Well, why put the dividend income from them into an ISA? If they are fantastic for income, why not just spend the dividend income on buying more of them?

    Most VCTs have dividend reinvestment programs to allow you to divert the income stream into buying more newly issued shares of the same VCT without needing to meet their minimum subscription level of £3k or £5k or £10k or whatever that you'd need to put in to a new fundraising round. That additional mini-subscription made on your behalf also has the pleasant side effect of qualifying for yet more income tax relief assuming of course you're actually paying some tax in the year it happens.
    • ColdIron
    • By ColdIron 15th Mar 17, 12:00 PM
    • 3,056 Posts
    • 3,469 Thanks
    ColdIron
    It looks like Hammond is to scrap his planned NICs changes, I suppose it would be too much to hope that he'll reverse the Dividend Allowance threshold reduction. Fingers and legs crossed
    • EdSwippet
    • By EdSwippet 15th Mar 17, 1:47 PM
    • 427 Posts
    • 388 Thanks
    EdSwippet
    It looks like Hammond is to scrap his planned NICs changes, I suppose it would be too much to hope that he'll reverse the Dividend Allowance threshold reduction. Fingers and legs crossed.
    Originally posted by ColdIron
    Unlikely. Under the arbitrary rules of government manifesto pledge logic, reducing or removing an allowance in a way that causes people's tax liability to increase is not a "tax increase".
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