'SAFE' Savings and Investment Strategy

Harvey's_Dad

Editor:

I'm of the understanding that ISA (or pension) fund managers used to be able to claim back the dividend tax credit on your behalf so that in your example rather than a dividend income of 3.5% it would be 3.888% ( = 3.5 * 10 / 9 ), so now the yield is 0.3888% less than it used to be.

Whilst I can understand what you are saying, 0.3888% doesn't sound very much, but aren't ISA savings often long term investments to supplement pension savings?

If the £1,000 in your example was invested over 25 years with a yield of 10.5% p.a. it would be worth £12,135 ( = £1000 * ( 1.105 ^ 25 ) ) as opposed the worth of the investment at a yield of 10.8888% p.a. of £13,247 ( = £1000 * ( 1.108888 ^ 25 ) ); over £1,000 difference - I believe that to be a significant difference especially if you consider the corresponding affect on the typical personal pension fund.

But is it significant enough to avoid investing in shares completely? I've no idea

EdInvestor

Yes, let me put it another way.

Outside an ISA, there is a 10% tax on divis, accompanied by a 10% tax credit which neutralises the tax, and thus you pay nil, nada no tax on the divi.

Inside the ISA, not only did you pay no tax on the divi, you got 10% extra added in from the Chancellor, a bit of tax relief if you like, bit like a pension.Now he's stopped adding in that 10%. ISAs are on the same basis as non-ISAs for basic rate taxpayers, no tax is payable.

Of course ISAs are very advisable for higher rate taxpayers and to avoid exposure to CGT.

But really we are talking pretty small amounts of money here.The main costs to watch out for are those of the providers, not the Government.

isasmurf

The dividend tax credit is a notional tax. The confusion arises because it is often said, as Paul as just said, that Basic rate taxpayers have to pay 10% tax on dividends. In fact basic rate taxpayers pay nothing on dividends. The 10% tax credit is there to say that tax has already been paid on the dividend by the company paying the tax. This tax credit is said to be equivalent to the basic rate tax and is there to avoid the investor being taxed on money that has already been taxed. Higher rate taxpayers have to pay the additional 22.5% tax on the dividend to make up the shortfall in tax between what the company has paid in tax and the higher-rate taxpayers tax rate.