With the government intent on raising more income from taxes, understanding the full impact of any fiscal changes on investments has arguably never been so critical. One area that has been subject to particularly sharp reductions recently is the Dividend Allowance, with changes likely to have a significant impact on many investors.

Six-year reduction
The annual tax-free Dividend Allowance was introduced in 2016/17 and originally stood at £5,000. In 2018/19, it was reduced to £2,000 and then halved to £1,000 from the start of the current tax year. This figure is set to halve again next April to stand at £500 – representing a 90% reduction in the value of the allowance in just six years.

Investor implications
An investor becomes liable for Income Tax on dividends after they’ve used their annual Personal Allowance (currently £12,570) and Dividend Allowance, with the rate of tax payable based on the Income Tax band they fall into. These changes will therefore inevitably increase the tax pressure on any individuals who own significant dividend-paying stocks or rely on dividends as a source of income, such as remuneration through a limited company.

What are the alternatives?
The Dividend Allowance is just one of the tax-free allowances that investors can utilise. It may be beneficial for dividend-heavy investors to explore alternative options that offer exemption from dividend tax on qualifying shares, such as Individual Savings Accounts (ISAs). ISAs also benefit in being free of Capital Gains Tax. Another option when investing could be to consider equities that prioritise long-term capital growth over dividend payments.

If you’re a company director of your own limited company, you can contribute to a director’s pension both as employer contributions and as an individual, claiming tax relief on both.

Taking sensible tax steps
As we reach the mid-point of the 2023/24 tax year, it’s the perfect time to reassess your finances. It’s important to ensure you are in the best place possible when it comes to tax planning, your investments and pensions. Sensible tax planning can help to reduce the amount of tax you pay and safeguard your wealth for the future. We can help – please get in touch.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change. The Financial Conduct Authority does not regulate tax planning.