The amount you can earn from dividends before you start paying tax will be cut from £5,000 to £2,000 in April 2018, but there are steps you can take to protect this income from being taxed.
Dividend tax applies to dividend income from shares (or equity funds) you hold outside an Isa or pension, or if you own a private company and pay yourself an annual dividend.
Basic-rate taxpayers are charged 7.5%, while higher-rate and additional-rate taxpayers pay 32.5% and 38.1% respectively. For the highest earners, the change could increase tax bills by £1,143 a year.
Your personal allowance can be used for dividend income, so if it’s your sole source of income, you can receive dividends worth up to £13,500 in 2017-18 before you’ll start to pay tax.
Still, no-one likes paying more tax than they need to. If you think you’ll be affected by the cut to the tax-free dividend allowance, consider these suggestions to lower the amount you’ll hand over to HMRC.
Find out more: dividend tax – learn more about how this tax works
1. Transfer your shares to an Isa
The simplest way to minimise the tax due on dividend income is to transfer the shares into an Isa. The amount you can put into your Isa each year will rise to £20,000 from April 2017.
This process, known as a bed and Isa, isn’t as simple as putting the shares into your Isa. You’ll need to sell your investments, transfer the cash to a stocks and shares Isa, and then buy the shares back.
This may not be cost-efficient for everyone. There’s a risk that the share price will rise before you can re-purchase your investments, and you’ll also incur dealing charges. Also, if you’ve held the shares for a long time, capital gains tax may be due. You can earn up to £11,300 in 2017-18 (£11,100 in 2016-17) from capital gains before any tax is due.
Find out more: capital gains tax on shares – our guide will help you calculate your tax bill
2. Transfer your shares to a Sipp
If you’ve already used your Isa allowance, another way to protect your dividend returns from HMRC is to transfer them to a Sipp.
As with bed and Isas, you’ll need to sell the shares and buy them back inside your tax-free wrapper. The same risks and costs will apply.
While your investments will grow tax-free, as they would in an Isa, you’ll need to pay tax when you come to access your money in retirement.
Find out more: is a Sipp right for you? – learn about the pros and cons
3. Transfer your shares to your spouse
Shares can be freely transferred between married couples and civil partners.
If one of you exceeds your dividend income allowance and the other doesn’t, you can reduce the tax you pay as a couple by gifting your shares to your partner.
If the shares are in a private, unlisted company this can be particularly useful, as private shares are ineligible for an Isa.