GIA and using up the £2k dividend allowance

Snakey

When deciding how much to put in to non-pension-non-ISA investments, in lieu of research I assumed a 5% return and on that basis had restricted myself to £40k.

Now I get around to looking up past dividend performance (the holding is VLS 100), assuming that "historic yield" is the number I should be looking at as a best estimate of future dividends, it seems I've over-estimated that return quite badly.

But before I do anything, would somebody who understands what they're looking at better than I do please confirm that I'm not talking nonsense about current/expected returns? There are a lot of items of information and I'm worried I'm picking up the wrong bit!

Also: How volatile are these things, typically? I know price can go up and down, but do dividends fluctuate like that too? Obviously if there's no such thing as a "typical" dividend payout for a fund and it's something that can't even be guesstimated, then I'll need to think again.

Looks like I'd need to buy before 3 April to get the May dividend, so I have a bit of time.

masonic

The main constituent of VLS 100 is the S&P500 index. You can find historic yield figures for the S&P index here. You'll see it has been as low as 1.1% in the recent past and as high as 3.7% going back to 1990. Other markets have higher dividends. For example, the FTSE All share has ranged from 2% to 5.8% over the same period.

Sometimes the spikes in yield are the result of stockmarket crashes, so if your £40k investment was paying out 2.5% yield you'd receive £1k, but after a 50% drop and a new yield of 5% you'd still receive £1k. Other times the yield will be linked to the cost of borrowing and/or rate of inflation.

Dividends are only half the story, capital gains tax might catch up with you before dividends tax does.

eskbanker

You can see the historical effect of dividends by comparing the Acc versus Inc versions of VLS100 at sites such as Trustnet:



Over the past year, Acc has risen 3.2% versus 1.3% for Inc, with the corresponding figures for three years 44.3% and 36.5%, then for five years 62.3% and 49.3%.

ColdIron

Are you confusing yield (dividends) and total return (growth plus dividends)? Different funds have different yields and 5% is a pretty optimistic 'average' value in any event. According to Vanguard the LifeStrategy 100 yield as at close 31 Jan 2019 was 1.75%. The unit price can vary quite a bit as you would imagine but distributions are much more stable. I wouldn't get too hung up about staying within the allowance, if you have to pay tax then 7.5% (at basic rate) is the sort of rate I can live with

londoninvestor

ColdIron wrote: »

I wouldn't get too hung up about staying within the allowance, if you have to pay tax then 7.5% (at basic rate) is the sort of rate I can live with

Agreed. Of course, fill your ISA before you buy unwrapped.

But even once you pass the £2k "allowance", a fund with a 2% yield will cost you 0.15% of the fund value annually in dividend tax if you're a basic rate payer, or 0.65% if you're a higher rate payer. That probably shouldn't be enough to make your equity exposure lower than is appropriate for your risk tolerance and investment objectives.

jimjames

You can also move £20k per year into an ISA so should be able to reduce that tax liability over time. It may work best if you keep the highest income funds inside the ISA and low yield ones outside.

Dazed_and_confused

As there is no actual "allowance" but a nil tax rate it is quite possible to stay within the £2k and incur an effective tax liability of 20% on what are commonly portrayed as "tax free" dividends.

Paying 7.5% is quite acceptable compared to having £2,000 taxed at 0% which actualy adds £400 to your overall tax bill

Mr.Saver

Dazed_and_confused wrote: »

As there is no actual "allowance" but a nil tax rate it is quite possible to stay within the £2k and incur an effective tax liability of 20% on what are commonly portrayed as "tax free" dividends.

Paying 7.5% is quite acceptable compared to having £2,000 taxed at 0% which actualy adds £400 to your overall tax bill

Sorry, I'm not following.

Could you illustrate how could the £2,000 dividends taxed at 0% adds £400 to someone's overall tax bill?

Snakey

I'm doing pension contributions to keep me just below the £100k. I have LTA issues (an enviable set of problems I've got, right?) so would rather not pay more into my pension than I need to, but it does seem sensible to use up the £2k if I can. I'm going for early retirement and the jury's still out on my private pension access age, so it makes sense to keep some capital available.

This will be next year's problem so I still have some flexibility. Since this one pays out in May there's plenty of time to finesse the pension conts if it's less. But it sounds like maybe I could drop a bit more in the GIA - while being mindful not to let the tail wag the dog.

Thanks all for your help, everyone.

Coldiron - yes, I suspect I'm confusing all sorts of things!

Dazed_and_confused

Could you illustrate how could the £2,000 dividends taxed at 0% adds £400 to someone's overall tax bill?

Using 2019:20 rates for simplicity,

Adjusted net income (all salary) without dividends £110,000.
Personal Allowance £7,500
Basic rate tax payable on £37,500 = £7,500
Higher rate tax payable on £65,000 = £26,000
Total tax payable £33,500


Adjusted net income with dividends of £2,000 added = £112,000.
Personal Allowance £6,500
Basic rate tax payable on £37,500 = £7,500
Higher rate tax payable on £66,000 = £26,400
Dividend nil rate payable on £2,000 = £0.00
Total tax payable £33,900


Dividends taxed at 0% could also increase the High Income Child Benefit Charge or reduce the amount of Married Couple's Allowance due.

Not going to affect everyone but some will paying more than they maybe expected.

Mr.Saver

Dazed_and_confused wrote: »

Using 2019:20 rates for simplicity,

Adjusted net income (all salary) without dividends £110,000.
Personal Allowance £7,500
Basic rate tax payable on £37,500 = £7,500
Higher rate tax payable on £65,000 = £26,000
Total tax payable £33,500


Adjusted net income with dividends of £2,000 added = £112,000.
Personal Allowance £6,500
Basic rate tax payable on £37,500 = £7,500
Higher rate tax payable on £66,000 = £26,400
Dividend nil rate payable on £2,000 = £0.00
Total tax payable £33,900


Dividends taxed at 0% could also increase the High Income Child Benefit Charge or reduce the amount of Married Couple's Allowance due.

Not going to affect everyone but some will paying more than they maybe expected.

Thank you. You've made it very clear and this is very helpful.

I didn't think of the effect of dividends on total taxable income which leads to reduced PA and/or other allowances.