Investment Income

dylon_2

Many Thanks for the info
it has given me much food for thought, i have an "advisor" coming round on Friday it will be interesting to compare his views.

EdInvestor

and if over the age allowance limit, can result in the reduction/removal of the age allowance creating a tax increase of up to £493 a year.

This applies to all income except that from ISAs. Of course it's wise to use you annual 7k ISA allowance for your HYP shares over the years.

dunstonh

The dividends are not taxed 10% at source because there is a dividend tax credit which offsets this for basic rate taxpayers.This tax credit partially offsets it for higher rate taxpayers,who will know about all this as it comes into their tax return.

The explanation is included in the HYP FAQs but here it is again for those who haven't already seen it.:rolleyes:

[You must have seen it at least 3 times DH, unless you've been deliberately ignoring it].

A financial adviser could face a mis-sale by calling dividend income tax free (because it isnt). You enjoy pointing out all the problems with financial services so its only fair when your errors get pointed out as well.

EdInvestor wrote:

This applies to all income except that from ISAs. Of course it's wise to use you annual 7k ISA allowance for your HYP shares over the years.

But it can be avoided by using an appropriate tax wrapper. ISAs, investment bond or low yield unit trusts/oeics for example.

EdInvestor

A lot of the confusion about the so-called tax on dividends is caused by the fact that it used to be possible to claim this tax (which hadn't been payable for years) back on money in an ISA.

In a most unusual lapse, GB had actually got himself in a situation where he was rebating tax which had not been paid in the first place.:rotfl: :rotfl:

That bit of "free money" has now been stopped, which makes some people think (understandably) that tax is now in fact being paid.

But it isn't.

Anybody who invests directly in shares knows this, as it all appears in your annual broker's statement.

Basic rate taxpayers don't pay any tax on dividends.Higher rate taxpayers pay 25%.

dunstonh

http://www.incademy.com/courses/Tax-and-your-investments/Keeping-it-legal/5/1104/10002

EdInvestor

DH

That link explains exactly what I mean.


Here's another one for the tax nerds...

First make your million.....;)

cheerfulcat

EdInvestor wrote:

Basic rate taxpayers don't pay any tax on dividends.Higher rate taxpayers pay 25%.

This is not correct. BRT payers have a 10% tax liability, which is satisfied by the dividend credit. HRT payers have a further 25% to pay. This is not just a point of semantics; BRT payers must declare the total of the dividend and the tax credit as income - it is quite possible for a BRT payer to be pushed into the HRT bracket by this means even if the actual income received is less than the threshold. If you were unaware of this, Ed, I think it's time you checked your tax returns.

moneytroll

Sorry, it may be a stupid question but I don't quite understand how you distinguish between dividend income and capital growth when you hold funds. Do you receive statements which clarify this? The overall performance of the funds is made up of divis and capital growth of the shares within the fund so how can you tell what the dividend is?
In a HYP, it seems a bit clearer what's divi income (when you look at yields) and what's capital growth.

Am I wrong in thinking that if divi income is usually around 4-5% from shares typically held in a HYP, you would need at least 600k capital to get to the 30k threshold (rough estimate) before you have to pay more tax? That's quite a lot (or 1.2 million if between two people!). And if you buy growth shares with low yields then presumably you can have an even higher capital invested in these.
Would the same calculations apply to funds?

dunstonh

Sorry, it may be a stupid question but I don't quite understand how you distinguish between dividend income and capital growth when you hold funds. Do you receive statements which clarify this?

Funds give you notification every year (or sometimes more frequently) as to how much income they generated. This needs to be disclosed on a tax return, when filling one in.

In a HYP, it seems a bit clearer what's divi income (when you look at yields) and what's capital growth.

Its exactly the same with funds.

Am I wrong in thinking that if divi income is usually around 4-5% from shares typically held in a HYP, you would need at least 600k capital to get to the 30k threshold (rough estimate) before you have to pay more tax?

If over 65, the age where income starts to increase your tax liability is just over £20,000 (reduction of age allowance). Higher rate tax would start higher than that although it would depend on your personal allowance.

Would the same calculations apply to funds?

Exactly the same with equity funds.

jem16

EdInvestor wrote:

The dividends are not taxed 10% at source because there is a dividend tax credit which offsets this for basic rate taxpayers.This tax credit partially offsets it for higher rate taxpayers,who will know about all this as it comes into their tax return.

Thanks for the link Ed.

However the point remains, no matter how you disguise it, that dividends are taxed otherwise what would be the need for a dividend tax credit? :rolleyes:

As Cheerfulcat says, it's not semantics. It becomes very important for those like myself who end up having to pay HRT because of income from savings and dividends and not salary.

To suggest that dividends are tax-free could lead to us choosing the wrong type of investment.