Home › Forums › The Dividend Letter Forum › 2017 Budget changes for HYPers
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Colin Harrison.
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13th March 2017 at 8:46 am #435811
Stephen Bland
ParticipantNot much in this Budget of direct relevance to us as dividend investors but there is one important point. The annual tax free allowance for UK dividend income on shares held outside a tax shelter, which is currently £5,000 for both 2016/17 and 2017/18, will fall very substantially to £2,000 from 06 April 2018.
It has always been my general advice to readers that HYPs be held in an ISA as far as possible within the annual contribution limits and following this change, the advice becomes even more pertinent. To assist a little with this, as announced previously by the government, the maximum annual ISA contribution limit rises quite a bit to £20,000 from 06 April 2017.
My advice to use an ISA applies even if at present you find that your dividend income is well below the tax free allowance. That’s because the allowance could easily be chopped even further in future and you can’t then make contributions for previous years to an ISA, it’s use it or lose it each year.
14th March 2017 at 9:27 am #435831Colin Harrison
ParticipantThanks for this, is there any way for readers to mitigate this new potential tax other than using the ISA allowance? The £3000 reduction in the tax free limit is a substantial one, especially for employed high/+ rate taxpayers and represents a potential cut in the size of a non-ISA held portfolio of about £60,000 (at a typical yield of 5%). Had the annual ISA limit been raised by about £60,000 per year and not £4,760, then that would have been tax neutral, but it wasn’t.
I like the idea of a HYP, but this is making me reconsider part of it, as the idea of being taxed on dividend income (to the tune of 32.5%+ of the yield) on invested savings that have already been income taxed is a bit tiresome really. Perhaps a non yielding growth only fund/trust or dare I say behind the bars of a SIPP, see previous very useful discussions on this. That would apply to a portfolio of, for example full ISA contributions, and maximum £40k non-ISA portfolio HYP -(at 5% yield), but what to do with any planned/potential investments above that?
Presumably this emphasizes that for “full” ISA’s any new purchases of relatively lower yielding shares (such as currently Br.Aerospace, or Unilever for example yielding about 3%+) would be made outside an ISA which helps a little, whereas Carillion, RDSB, VOD et al (currently yielding 6-8% plus) should ideally be purchased inside an ISA in the next ISA year or moved into an ISA if held externally.
best regards,CSH
PS I’m aware that you are not able to provide individual advice, so this is of course a general type of inquiry.
14th March 2017 at 1:08 pm #435842ParticipantI have little general tax avoidance advice to offer other than using ISAs to the limit. As you say, it makes sense if you have the choice to put the higher yielding shares in first if the limits don’t permit your whole HYP to be moved in.
Also speaking generally, I don’t like SIPPs used purely as a tax avoidance vehicle because they reduce investment freedom and carry too many onerous restrictions and costs in my opinion.
The whole idea of HYPs is to generate income, even for those who are not yet at the drawing stage, so the alternative you mention of a low or zero income growth fund is not an alternative to HYPs, it is a different investment approach. Note though that HYPs and income funds often grow better over time than so-called growth funds on a reinvested income basis.
You either believe in the HYP philosophy or you don’t and this should not be influenced by tax in my view. Investors tend to have an affinity for a particular approach because it’s worked for them and suits their personality, not because of tax.
14th March 2017 at 8:32 pm #435867ParticipantThanks for this, a few things to think about there.
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