The dividend tax allowance has been steadily decreasing over the past few years, with the current allowance standing at a mere £500. Anyone earning more than this amount in dividend income will be subject to tax, regardless of their tax bracket ...
It is important to keep track of your dividend income and report it accurately on your tax return!
As a result, HMRC has predicted that almost double the number of people will be paying tax on their dividends this year compared to just three years ago. So, how can UK investors avoid falling into the dividend tax trap?
Here are some top tips to help you reduce your tax liability and keep more of your hard-earned money:
Utilise Your ISA Allowance
One of the most effective ways to avoid paying tax on dividends is to invest through an Individual Savings Account (ISA). Any dividends earned within an ISA are completely tax-free, making it a valuable tool for minimising your tax liability. The current annual ISA allowance is £20,000, so take advantage of this tax-efficient investment vehicle.
Consider Holding Dividend-Paying Stocks in a Pension
Another tax-efficient way to receive dividend income is through a pension. Any dividends earned within a pension are not subject to tax, and you can also benefit from tax relief on your contributions. This makes pensions a valuable tool for long-term investment planning and minimising your tax liability on dividends.
Work with your spouse
Married couples and civil partners can transfer investments between themselves which can reduce tax liabilities if one partner is not using their dividend allowance fully or is in a lower tax band. Transfers between spouses are not subject to Capital Gains Tax.
Time Your Dividend Payments
If you have control over when dividends are paid out, try to time them in a way that minimises your tax liability. For example, if you are close to reaching the higher tax bracket, it may be beneficial to delay dividend payments until the next tax year when your tax rate will reset. This can help you avoid paying a higher rate of tax on your dividends.
Consider Tax-Efficient Investments
Certain investments, such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS), offer tax benefits that can help you reduce your tax liability on dividends. These investments are riskier and require a longer-term commitment, but they can be a valuable tool for minimising your tax bill.
Keep Track of Your Dividend Income
It is important to keep track of your dividend income and report it accurately on your tax return. Failure to do so can result in penalties and interest charges from HMRC. Make sure to keep detailed records of all your dividend payments and consult with a tax adviser if you are unsure about how to report them correctly.
Paying tax on dividends can be a significant burden for investors, especially as the allowance continues to shrink. However, by utilising strategies such as investing through ISAs and pensions, taking advantage of personal allowances, and timing dividend payments, it is possible to minimise your tax liability and keep more of your investment returns.
Make sure to consult with a tax adviser for personalised advice and to stay updated on any changes to tax laws that may affect your dividend income. With careful planning and strategic tax management, you can beat the dividend tax trap.
And this will protect your investment returns.
Until next time ...
HELEN BEAUMONT
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about dividend taxes and how you can minimise them, do give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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