S & S ISA and new £5000 dividend allowance

Laughing_Boy

I have a query re the new £5000 dividend allowance:

My understanding is that the 10% dividend tax credit within Stocks & Shares ISAs was abolished in 2004 and that therefore dividends received from funds within an ISA are taxed at source at the basic rate (so the only benefit of holding equity funds in an ISA is for higher-rate taxpayers who are exempt from any higher-rate tax).

Will dividends still be taxed at basic rate in an ISA after April 2016? As far as I know the government has not announced any changes to the treatment of dividends in an ISA. Their website page re the new dividend allowance confusingly says "... dividends received on shares held in an Individual Savings Account (ISA), will continue to be tax free"- but they are not tax-free!!

If the treatment of dividends within an ISA is not changing then would it not make sense to remove the ISA wrapper in order to benefit from the new £5000 dividend allowance?

Archi_Bald

The amount of dividend payments is totally unaffected by the introduction of the new dividend allowance. You get paid the same amount of dividend whether your investment is held in an ISA or not.

You already pay absolutely no tax of any sort for anything you hold in an ISA. There's therefore absolutely nothing to gain by un-wrapping your existing ISA investment. But you can lose by un-wrapping.

EDIT: if you want a Bowlhead lecture on the matter: http://forums.moneysavingexpert.com/showpost.php?p=69856282&postcount=10

Laughing_Boy

OK thanks Archi.

So the following statement from LearnMoney.co.uk is incorrect ??

"In 2004 the 10% dividend tax credit within ISAs was abolished. This means if you are a basic rate taxpayer there is no advantage to holding shares in an ISA as you would pay the same 10% tax (on dividends) if the shares were held outside the ISA wrapper."

jimjames

Laughing_Boy wrote: »

OK thanks Archi.

So the following statement from LearnMoney.co.uk is incorrect ??

"In 2004 the 10% dividend tax credit within ISAs was abolished. This means if you are a basic rate taxpayer there is no advantage to holding shares in an ISA as you would pay the same 10% tax (on dividends) if the shares were held outside the ISA wrapper."

Yes it is incorrect overall. But to clarify, it is correct in part. There is no benefit for dividends as a basic rate taxpayer but there is benefit for capital gains. There is also a benefit if you move into a higher tax bracket. It's poor advice to say not to use a tax wrapper without spelling out the downsides.

If you decide an ISA isn't worth the bother and keep your investments unwrapped then a few years down the line have £100k invested you'll be a bit stuck if you need to sell or your tax rate increased.

Archi_Bald

Yes, LearnMoney.co.uk, whoever they are, is incorrect. It should be worth reading that Bowlhead lecture.

EDIT: I had a quick look at learnmoney.co.uk and almost instantly concluded they are stuck in the past and not concerned with providing current information. For example:

learnmoney.co.uk wrote:

At the moment up to a maximum of £3,600 can be paid into a Cash ISA in any one tax year, which runs from the official tax year date of April to April. However from 6th April 2010 this amount will be raised to £5,100.

Laughing_Boy

Yes I am aware that ISA's provide protection from CGT and for higher rate taxpayers. Also interest from bond funds is tax-free. But I have long thought that dividends are taxed at 10% ...

Archi_Bald wrote: »

You already pay absolutely no tax of any sort for anything you hold in an ISA.

Well it's not only Learnmoney.co.uk which is "wrong". Even the government's advice website https://www.moneyadviceservice.org.uk/en/articles/stocks-and-shares-isas says:

"dividends are taxed at 10% ..." so a Stocks & Shares ISA " provides no benefit to basic rate taxpayer"

and

"Apart from dividend income (paid with 10% tax already deducted which can’t be reclaimed), the rest of the income is tax-free"

and http://www.which.co.uk/money/tax/guides/tax-on-savings-and-investments/dividend-tax says :

"Dividends are automatically taxed (called 'taxed at source') at the rate of 10%. ... The 10% deduction is to be abolished from the start of the 2016-17 tax year. Instead, investors will receive a £5,000 allowance, meaning the first £5,000 of dividend income will be tax free."

So the fact that the 10% deduction is being abolished answers my original question.

Archi_Bald

Did you actually read the Bowlhead lecture?

Eco_Miser

In 2004, not only did the tax credit become irreclaimable, but the government stopped taking the tax off dividends. To deal with the additional tax higher rate taxpayers pay, a notional tax was added to the dividend then taken off again.
But really Bowlhead tells it much better than me

Laughing_Boy

Yes I read & understood Bowlhead's post.

It seems odd that the government's own information states "dividends are taxed at 10%".

Perhaps they are referring to corporation tax.

colsten

Laughing_Boy wrote: »

It seems odd that the government's own information states "dividends are taxed at 10%".

Have you got a link please?

C_Mababejive

If you get more than £5000 divis then you will have to pay more tax so they would be better off in an ISA but then it may be too late to shelter excess divis.
Also correct me if im wrong but isnt divis classed as income and therefore any excess over 5k could move you into a higher tax bracket?