Good news for dividend investors – the Government has made a U-turn on its plan to cut the dividend allowance from £5,000 to £2,000. The change was announced in the Spring Budget by Chancellor Philip Hammond, but has been dropped from the Finance Bill in the lead up to the snap general election on 8 June.
What is the dividend tax allowance?
The tax-free dividend allowance lets you take up to £5,000 of income from dividends without paying any Income Tax. Above this amount, dividend payments are usually taxed at between 7.5% and 38.1% depending on which tax band you are in. If your dividend-paying shares are held in an ISA you won’t pay any tax at all.
The power of dividends
Dividends are small portions of a company’s profits paid to shareholders, usually every three months. This makes them a popular choice for investors looking for a regular income, especially as interest rates on savings accounts are currently at all-time lows.
Dividends aren’t just great for income-seeking investors though – reinvesting them can significantly boost your total returns. Historically, much of the total return from UK equities has come from reinvesting dividends. Over the last 25 years the FTSE All-Share index has grown 214%, but this figure jumps to 644% if reinvested dividends are included*.
Speak to an expert about your tax allowances
This change to the dividend allowance can make a big difference for people looking to make the most of their allowances and take an income tax-efficiently. To find out how the change could affect your financial plans, or to check that your savings and investments are as tax-efficient as possible, get in touch with your usual Tilney contact or book an appointment with a Tilney financial planner.
*Source: Lipper for Investment Management, data to 31/01/2017.
This article was previously published on Tilney prior to the launch of Evelyn Partners.