If the dividend income was more than £10,000 then the clients would now need to submit a self-assessment, which can be done online or via paper but the deadlines for each would be different depending on the method used.
More changes in 2018
The £5,000 dividend allowance was short-lived and from April 6 2018, while the tax rates stayed the same, the allowance was reduced to £2,000, which had a real impact on a client’s unwrapped portfolios, as demonstrated in the table below:
Unwrapped portfolio
| Yield | £5,000 allowance | £2,000 allowance |
| 3% | £166,000 | £66,000 |
| 3.5% | £142,750 | £57,000 |
| 4% | £125,000 | £50,000 |
Let’s focus on the 3.5 per cent yielding portfolio in the table above. When the allowance was £5,000 a portfolio valued £142,750 and below would have meant the dividend income would be covered by the allowance.
Since it reduced to £2,000 this value has dropped to £57,000 meaning there is an additional £2,992.50 of dividend income, subject to tax at the client’s rate of tax, and this could push them into the higher rate tax band.
This could be worse if the unwrapped portfolio is held with a discretionary trust as it used to be that if there was no tax, then no return was required, but even a small tax liability needs reporting. So with no dividend allowance, if we imagine there is no other income for this trust and the settlor has only set up one trust and we took a portfolio valued at £142,750 yielding 3.5 per cent then the tax due would be as follows:
- £142,750 at 3.5 per cent = £4,996.25 dividend income.
- First £1,000 of income taxed at 7.5 per cent (2021-22) = £75.
- £3,996.25 at 38.1 per cent = £1,522.57.
- Total tax = £1,597.57.
Distributions of dividends to the beneficiaries will be paid net with a certificate (R185) showing the tax accounted for by the trustees at 45 per cent (the tax credit). So, care needs to be taken if all the dividend payments are made to the beneficiary as there is a shortfall between the tax credit and tax paid and this will need to be accounted for by a tax pool charge by the trustees.
The beneficiary will be liable to tax at their own marginal rate on the gross distribution, but if this is more than the tax credit, some or all the tax credit can be reclaimed.
Another consideration would be the time and effort that it takes to report this to HMRC and whether a professional tax adviser would be required to gather all the information, especially if the investments held are a mix of dividend and interest-bearing assets. With the complexity involved for reporting this to HMRC, this would all add cost, both in terms of time and money to the trustees.
April 6 2022
On September 7 2021, the prime minister announced plans to greatly increase the funding for health and social care over the next three years.
