Dividend tax changes in 2016 What they mean for investors

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1 Dividend tax changes in 2016 What they mean for investors The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. Selftrade does not provide investment advice. If you are in any doubt as to the risk or suitability of an investment or product you should seek advice from an independent financial adviser.

2 Dividend tax changes The Telegraph online declared Budget 2015 Investors face tax raid on dividends. While this may be true for those with large income portfolios, not everybody loses out. In fact for those who do not currently invest in stocks and shares, there is potentially now a tax incentive to do so. Very importantly, dividends in tax wrappers such as SIPPS and ISA s are not affected.

3 What is the current tax calculation? Here is a quick recap. As companies have already been taxed on their profits (Corporation tax is levied at a rate of 20% for small companies), a notional 10% tax credit is applied to their dividends. The net dividend (the amount distributed to a shareholder) is multiplied by 10/9 to provide the gross dividend amount, including the tax credit. This is the sum upon which income tax is payable. For dividends which fall within the basic tax band there is no further tax to pay at all on dividends, as the 10% basic dividend tax rate is cancelled out by the 10% tax credit. For dividends falling in the higher rate tax band a 32.5% tax rate applies. However, after taking into account the 10% tax credit, you only pay an effective 25% rate of tax on net dividends falling within the higher tax band. Dividend tax is levied at 37.5% on all income falling in the additional tax band (over 150,000); 30.6% after the tax credit has been included. On a 100 dividend this is how it works: Taxpayer Dividend/notional dividend Tax rate Basic rate 100/ % 0% Higher rate 100/ % 25% Actual tax percentage Additional rate 100/ % 30.6%

4 The tax calculation from April 2016 This system of grossing up the dividend will end in April 2016 and be replaced by a new system that will give all taxpayers a personal allowance of 5,000. This will be much simpler but there are some winners and losers in terms of how much tax investors will pay. For dividend payments below the allowance of 5,000 Taxpayer Dividend Tax rate Actual tax percentage Basic rate 1, % 0% Higher rate 1, % 0% Additional rate 1, % 0% For dividend payments above the 5,000 allowance Taxpayer Dividend Tax rate Actual tax percentage Basic rate 10, % 3.75% Higher rate 10, % 16.25% Additional rate 10, % 19.05% Taxpayer Dividend Tax rate Actual tax percentage Basic rate n/a n/a n/a Higher rate 100, % % Additional rate 100, % %

5 So who are the winners and losers? Investors all have a chance to benefit but there are thresholds: those with relatively low incomes from dividends i.e. less than 5,000 will benefit most paying no dividend tax at all higher rate tax payers are better off until their dividend income exceeds 20,400 additional rate tax payers will gain until they hit the 25,000 income level

6 Other shareholders impacted Self-employed people using Limited Companies as a tax efficient/avoidance scheme, by choosing to operate a Limited Company for the purposes of their work, will be most impacted. It will no longer be as tax efficient to pay themselves in the form of dividends, as opposed to using PAYE, to avoid National Insurance and pay lower tax rates. Entrepreneurs will be similarly hit. This could have an impact on business sales as there are very good tax incentives for the entrepreneur to sell their business. Entrepreneurs relief allows the entrepreneur to sell their business with a capital gains tax rate of just 10%.

7 What are investors possible choices? Using the CGT allowance Investors could make use of the Capital Gains Tax (CGT) allowance to mitigate the ex-dividend effect by selling shares for capital gain in the days before a stock goes ex-dividend. This would lock in the gain but forego the income. With a limited CGT allowance larger portfolios will receive a limited benefit, however the top rate of capital gains is only 28% compared to 38.1% on income for the additional rate taxpayer. Growth v income The other tool in the investor s armoury is to opt for growth stocks with lower yields, thereby reducing the overall income level in the portfolio and again pushing the portfolio towards gains tax rather than dividend income tax. Tax wrappers ISAs and SIPPs are not impacted by the changes. Dividend income generated by stocks held in an ISA is protected against tax. For those not already utilising their allowance this could be a viable way to mitigate tax exposure under the new regime.

8 The future of dividends One possible outcome of the changes is that companies might consider moving away from cash dividends and more into share buybacks but many companies already do this and dividends are still attractive to many investors. The payment of dividends is never certain and it is important that investors carefully consider their longer term goals and the choices available to them before making investments decisions. If you are uncertain about an investment it is always best to seek professional, independent financial advice.

9 In summary Only time will reveal the full impact the changes to dividend tax will have on investors and the wider market, but there are many investors who stand to gain. With the pension reforms also coming into effect next year many people will be striving to match the income that they received from an annuity. However, where some will benefit others will take the decision to move towards growth rather than income - the additional rate taxpayer will recognise the fact that 38.1% capital gains tax they will pay is still below their normal tax rate of 45%, and the higher rate taxpayer the rate of 32.5% is well below their normal tax rate of 40%.

10 A couple of scenarios 1. Taxpayer Dividend income New tax Old tax Portfolio size at 4% yield Basic rate 5, ,000 Higher rate 20,000 4,875 5, ,000 Additional rate 50,000 17,145 15,300 1,250, Taxpayer Dividend income New tax Old tax Portfolio size at 4% yield Basic rate 10, ,000 Higher rate 50,000 14,625 12,500 1,250,000 Additional rate 500, , ,000 12,500,000

11 What Take control is the current of your tax calculation? investments with Selftrade Here is a quick recap. As companies have already been taxed on their profits Whether (Corporation you have lump tax sums is levied to invest at a or rate prefer of to 20% invest for smaller small companies), sums regularly, a notional Selftrade can 10% help tax you credit to take is applied control to of their your own dividends. financial future. The Depending net dividend on your objectives (the amount you distributed can choose to to have a shareholder) one or more is of multiplied a Shares by ISA, 10/9 a SIPP to dealing provide account the gross or a standard dividend dealing amount, account including with Selftrade, the tax credit. This ensuring is the you sum have upon access which to tax-efficient income tax investment is payable. schemes as well as unlimited trading potential. For dividends which fall within the basic tax band there is no further tax to All pay of our at products all on dividends, give you access as the to 10% our reliable basic dividend and easy tax to use rate investment is cancelled out platform, by the with 10% over tax 8,000 credit. UK and international shares, bonds and Gilts, funds from the world s leading investment managers, and derivatives for the more advanced investor. For dividends falling in the higher rate tax band a 32.5% tax rate applies. However, Services such after as Dividend taking into Reinvestment account the and 10% Limit tax and credit, Stop Loss you only orders pay make an effective it as easy as 25% possible rate of to tax trade on the net way dividends you want falling to without within becoming the higher a full tax time band. investor. Dividend And our mobile tax is trading levied apps at 37.5% give you on all access income to share falling trading the on additional the move. If tax you band can connect (over 150,000); to us, we can 30.56% connect after you to the the tax markets. credit has been included. On Visit a dividend this to is find how out it how works: you can enjoy a greater sense of choice and control over the investment decisions you make. Taxpayer Contact Us Dividend / notional dividend Tax rate True tax percentage Customer Basic rate Services 100/ % 0% Telephone: (or from overseas) Higher rate 100/ % 25% Lines are open 7:45 am to 7:00 pm Monday to Friday Telephone Additional trading Rate is available 100/ 111 from 8:00 am to 37.5% 4:30 pm 30.6% us at: info@selftrade.co.uk or visit the website at Selftrade is a trading name licensed to Equiniti Financial Services Limited. Equiniti Financial Services Limited is part of the Equiniti Group. Their registered office is Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. Investment and general insurance services are provided through Equiniti Financial Services Limited, which is registered in England & Wales with No and is authorised and regulated by the UK Financial Conduct Authority. Equiniti Financial Services Limited is a member firm of the London Stock Exchange.