Getting dividends

Uriziel

HMRC is charging me tax left and right because of my interest income so I have been looking for ways to make a return on my savings elsewhere. I have already moved money to Premium Bonds but I want to move more of it away and have seen that I have a £500 dividend allowance that I would like to maximize. I have already mixed my ISA.

Is there any easy way for me to start receiving dividend income? I used to have a Chip account that advertised a return on investments in the S&P 500.
I don't mind going back to Chip if it is a good choice but is there any better alternatives? I just want to move my money into an account and leave it there and get paid dividends on a yearly basis.

I know that this is a risk and that the market can go up and down.

Isthisforreal99

Are you a higher rate taxpayer?

Are you letting the tax tail wag the dog?

dunstonh

Is there any easy way for me to start receiving dividend income? I used to have a Chip account that advertised a return on investments in the S&P 500.

Investing 100% into the S&P500 would be poor quality investing.   Its putting all your eggs into one country.  Historically, global ex US vs US cycle with each other.      For the last 12 years, US has been best. For the 12 years or so before tha, global Ex US was better.    YTD, global has been better

So, picking one country and ignoring others is a riskier decision.

Also, an S&P500 tracker is not good dividend option and you are more likely to be concerned about capital gains tax.

That said, having a suitable amount in unwrapped investments and then annually bed & ISA and annual CGT use is a good way to reduce tax liabilty.  Depending on the amounts involved, the investment bond tax wrapper could also be considered.  Although you can only get those via IFAs.

If you are aged under 75, the pension tax wrapper is frequently more tax-efficient than the ISA tax wrapper.

Uriziel

Isthisforreal99 said:

Are you a higher rate taxpayer?

Are you letting the tax tail wag the dog?

Yes I am paying 45% tax

Uriziel

dunstonh said:

Is there any easy way for me to start receiving dividend income? I used to have a Chip account that advertised a return on investments in the S&P 500.

Investing 100% into the S&P500 would be poor quality investing.   Its putting all your eggs into one country.  Historically, global ex US vs US cycle with each other.      For the last 12 years, US has been best. For the 12 years or so before tha, global Ex US was better.    YTD, global has been better

So, picking one country and ignoring others is a riskier decision.

Also, an S&P500 tracker is not good dividend option and you are more likely to be concerned about capital gains tax.

That said, having a suitable amount in unwrapped investments and then annually bed & ISA and annual CGT use is a good way to reduce tax liabilty.  Depending on the amounts involved, the investment bond tax wrapper could also be considered.  Although you can only get those via IFAs.

If you are aged under 75, the pension tax wrapper is frequently more tax-efficient than the ISA tax wrapper.

I am only wanting to pay £20k into an index fund so that I can at least maximize the £500 dividend tax free allowance. I know that an index fund is worse returns because I am putting my eggs into all baskets so if for example computer companies explode it might increase the entire index by a little whereas if I only invest into computer companies I would get a massive return but it is also safer.
But I am not really looking for exceptional returns, I just want to get the dividend allowance and get some money out of my savings account.

My savings account is currently at 4.75% so after the 45% tax that is 2.61%. I am sure that having those £20k in the S&P 500 will give me a bigger return than that after one year.

I don't want to pay into my pension because I don't like the idea of having to wait to use the money. I already get some money from my pay moved into a pension. The employer matches it. I still want to buy property once the interest rates go down so I might want to use the money.

Exodi

I think after reading your later comments, one of the first replies in this thread along the lines of 'letting the tail wag the dog' is indeed the case here.

You seem to be prioritising tax reduction at all costs over overall returns.

How much do you have in savings? How much do you have in investments?

Deciding to invest £20k in an index fund exclusively for the dividend allowance is a strange justification.

Not wanting to pay into your pension because of not liking 'the idea of having to wait to use the money' is something your future self may dislike you for.

What is your pension situation? As an additional rate tax payer, it will be a hard adjustment if your plan is to be plunged into relative poverty when you eventually reach retirement.

It's sad to think about the significant amount of money being spent tax to enable you to save up a vast 5 or 6 figure savings amount, to eventually buy property once interest rates go down - compared to GIA investing or increasing pension contribution's and receiving higher rate tax relief and taking out a low interest rate mortgage. FWIW my investments have a XIRR of around ~13%, it makes very little sense to give up this to save myself the ~5% that is charged on a mortgage.

Your plan and outlook just doesn't make sense to me, I'm sure Rachel Reeves appreciates it though.

dunstonh

I am only wanting to pay £20k into an index fund so that I can at least maximize the £500 dividend tax free allowance.

In which case £20k in a fund tracking the S&P500 wont use up the £500 allowance.  You could go higher than that.

 I know that an index fund is worse returns because I am putting my eggs into all baskets so if for example computer companies explode it might increase the entire index by a little whereas if I only invest into computer companies I would get a massive return but it is also safer.

That is not correct.  An index fund will only track the benchmark in question.  Its actually the best way in most periods.   The issue is the benchmark you have mentioned.  A global tracker would be more suitable as a single fund solution. 

But I am not really looking for exceptional returns, I just want to get the dividend allowance and get some money out of my savings account.

Unwrapped investments are subject not only to dividend taxation/allowance but also to capital gains tax. 
However, CGT is lower than the additional rate tax, and indeed, many additional rate taxpayers use gains taxed under CGT as a priority rather than dividends and will look for growth investments rather than value investments.    24% CGT is better than income tax at the additional rate and it gets an annual £3k allowance

My savings account is currently at 4.75% so after the 45% tax that is 2.61%. I am sure that having those £20k in the S&P 500 will give me a bigger return than that after one year.

In some years yes.  In some years it can drop 50%.

ColdIron

Not using a pension as an additional rate taxpayer would be bonkers, it may also reduce the amount of higher/additional rate tax you pay on income. If you are just matching employer contributions it sounds like you may be neglecting it's importance at your income

The S&P 500 yields about 1%. You are likely to be far more troubled by capital gains tax or a significant capital loss. Is it worth it to save yourself a couple of hundred quid?

wmb194

Uriziel said:

HMRC is charging me tax left and right because of my interest income so I have been looking for ways to make a return on my savings elsewhere. I have already moved money to Premium Bonds but I want to move more of it away and have seen that I have a £500 dividend allowance that I would like to maximize. I have already mixed my ISA.

Is there any easy way for me to start receiving dividend income? I used to have a Chip account that advertised a return on investments in the S&P 500.
I don't mind going back to Chip if it is a good choice but is there any better alternatives? I just want to move my money into an account and leave it there and get paid dividends on a yearly basis.

I know that this is a risk and that the market can go up and down.

There are lots of equity income funds - OEICS, ETFs and Investment Trusts - that you can invest in via stockbrokers. iWeb's never a terrible choice but there's Trading212, Freetrade and many others.

Investment Trust dividend heroes: https://www.theaic.co.uk/income-finder/dividend-heroes

UK Equity Income ITs: https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=UGI&sortid=NetDivYld&desc=true

TheTelltaleChart

If reducing tax is the main concern, just put some in a non-interest-paying current account.

Although other posters are correct that higher pension contributions are a very good way for additional rate income tax payers to reduce their tax paid, your reason for building up accessible cash — buying a property — is a valid one. But it depends on the numbers.

So ... What approximate value of property would you be looking to buy? How much depost have you built up already? How much could you plausibly borrow if buying with a mortgage (i.e. the lower of: what would mortgage providers to be prepared to lend you? and what level of borrowing would not overstretch your finances?)?

The answers to those 3 questions will indicate whether you need to build up more accessible cash now. If you don't, much higher pension contributions are almost certainly the answer.

EthicsGradient

"I still want to buy property once the interest rates go down so I might want to use the money."
That's a good reason for not putting more into a pension beyond what gets your employer to make contributions. But if that's the case, you need to think about the timescale when you might buy the property - no one can say "this is when interest rates will come down" with accuracy, so it might just be better to think of your personal circumstances (might you get posted elsewhere? Possibility of kids, needing a decent house size?) for the timing. If that's quite likely to be within 5 years, then you'd be taking a fair risk on how the invested money will do - it's pretty much chance if you invest low or high, and also if you eventually sell low or high.

If it is likely to be more than 5 years, or you're happy with the risk, then a global tracker is a reasonable idea. Vanguard's FTSE Develop World yields about 1.4%, so that would roughly get £500 from £35k investment. At that amount, you should probably think about capital gains tax too, if you hold it for several years.

You also say you've maxed your ISA allowance(s) - is that in a cash ISA, or S&S ISA? You should work out the total you have in premium bonds, savings accounts (inside and outside an ISA wrapper) and any share investments not in your pension (assuming you're decades away from 57, so it would be reasonable to look at that separately), and decide how much you want in cash that's safe, and how much you feel comfortable with in share investments. Then you can see how much you can have outside the ISA wrappers without paying tax on interest or dividends (and not attracting capital gains tax if you hold a fair amount for a fair time). And which it's worth holding inside the ISA wrapper to keep the tax down.

But the "don't let the tax tail wag the investment dog" advice does apply - decide the savings and investments you're happy with, then look at how to pay minimum tax on them.