dividends v growth & tax

Theyarv1

I have a few Qs about dividends and tax

Am i right in thinking that if i am a higher rate tax payer, that I would prefer growth to income if i had a choice (e.g. Dividend is 5% a year or growth of 5% a year - just for arguements sake you 'knew'), that it would be far better to take the growth as my cgt would be 28% rather than paying 40% on the dividend?

If so, would it be smarter to buy a share just after the x dividend date? That way the shares are likely to be cheaper by around the dividend about to be paid out.

Secondly, if you reinvest dividends, do you still have to pay the extra tax? I ask because i've read a couple of books and magazines that say if you had 10k in 1960 (or whenever), your investment would now be £40k if you hadn't reinvested but 1m if you had (or some really starkly diifferent figures) - however, i bet those reinvested dividends didn't get taxed and are based solely for the lower tax bracket - which would also make no sense as recently your 1m would be paying out 50k and put you in higher bracket which is never mentioned, so where they compounded 10k by 1.06^50, it should have been 10*(1.06*.6)^50 - right?

TrickyDicky101

Been a long while since I did any personal tax (or corporate tax for that matter) but I believe marginal rate of tax on dividends received by a Higher Rate (ie 40%) taxpayer is 25% of the dividend received. So if you receive a divi of £100, tax payable by you in respect of this dividend when you complete your tax return would be £25. For a basic rate taxpayer, marginal rate on dividends is zero.

You can choose when you pay CGT (eg by selecting when you sell the share) and you have an annual allowance of over £10k for chargeable gains. Yes it would be smarter to buy after the share has gone ex-dividend otherwise you are likely to end up paying unnecessary tax.

sabretoothtigger

Its 20% tax credit I think

If so, would it be smarter to buy a share just after the x dividend date? That way the shares are likely to be cheaper by around the dividend about to be paid out.

If you like the company it will be your belief that it will go up more then down so generally you should buy before. But that is an eternal dilemma, sometimes best to wait as the market goes down

Theyarv1

TrickyDicky101 wrote: »

Been a long while since I did any personal tax (or corporate tax for that matter) but I believe marginal rate of tax on dividends received by a Higher Rate (ie 40%) taxpayer is 25% of the dividend received. So if you receive a divi of £100, tax payable by you in respect of this dividend when you complete your tax return would be £25. For a basic rate taxpayer, marginal rate on dividends is zero.

You can choose when you pay CGT (eg by selecting when you sell the share) and you have an annual allowance of over £10k for chargeable gains. Yes it would be smarter to buy after the share has gone ex-dividend otherwise you are likely to end up paying unnecessary tax.

good point, not sure where i stand now mathematically :mad:
:rotfl:

Theyarv1

sabretoothtigger wrote: »

Its 20% tax credit I think



If you like the company it will be your belief that it will go up more then down so generally you should buy before. But that is an eternal dilemma, sometimes best to wait as the market goes down

For arguements sake, the x dividend date is tomorrow, so you can buy today or tomorrow

xrjtg

Theyarv1 wrote: »

If so, would it be smarter to buy a share just after the x dividend date? That way the shares are likely to be cheaper by around the dividend about to be paid out.

Near the ex-div date then you would indeed prefer to purchase afterwards. Dividends simple convert capital to income, which as you say is not tax efficient. You also save any percentage dealing charges on the amount that would have been returned as a dividend.

Loughton_Monkey

Theyarv1 wrote: »

....If so, would it be smarter to buy a share just after the x dividend date? That way the shares are likely to be cheaper by around the dividend about to be paid out.....

This may make mathematical sense, but it is harldly sensible to restrict yourself to only one or two days a year on which you can sell a share!

Theyarv1

im 95% sure you do, but just to double check - I have to pay the extra 25% at the end of the year on all divis, reinvested or not

CLAPTON

Theyarv1 wrote: »

im 95% sure you do, but just to double check - I have to pay the extra 25% at the end of the year on all divis, reinvested or not

yes you pay 25% extra tax on all dividends whether re-invested or not

sabretoothtigger

Theyarv1 wrote: »

For arguements sake, the x dividend date is tomorrow, so you can buy today or tomorrow

Have to be an owner at 7.59am Wed I think which would mean today to buy

Not heard of a share where you can buy mid day and still qualify. Its about the record date rather then the day you buy which is like 3 days forward.
I guess that makes more sense as wed would be Saturday in that case where as tues close matches 3 full days to record you as the owner in that week.

You can tell anyway, the price almost always falls to equal the payment lost to any new owner