Rachel Reeves announced a number of income tax rises in her Autumn budget. Most of the tax rises aren’t due to come in for another year or so, but the first tax to rise will be the tax on dividends.

Don’t worry – dividends in ISAs and pensions aren’t going to be subject to tax, and there will be no change to the tax treatment of dividends in investment bonds, but more tax will be payable on any other dividend income.

The amount of the increase is relatively small – the rate of tax will increase by 2%, unless your taxable income exceeds £125,140, in which case there will be no increase at all. I still find it hard to understand why a Labour government decided not to increase the tax rate for the highest earners.

The first £500 of dividends remains tax free. From next year, basic rate taxpayers will pay 10.75% income tax on their dividends in excess of this, higher rate taxpayers will pay 33.75% and additional rate taxpayers will pay 39.35%. But that’s not the highest rate – if your taxable income is between £100,000 and £125,140, you will pay an effective rate of 50.625% (so just over half of your dividend will be paid to the government!). Dividends are paid out of profits that have been subject to corporation tax, and it’s almost best not to think how much of each £1 of profit is taken in a combination of these two taxes.

Dividends tend to be paid by two types of companies:

• Those over which you have no control (e.g. quoted companies, funds made up of shares).
• Those where you have control of the company, and therefore can decide how much you pay out in dividends.

There is very little you can do about dividends from the first type of company. You could transfer some of your shares into ISAs, or sell them and buy them back in a pension, but doing any of these things could give rise to a capital gains tax liability. Over time, company dividends tend to gradually increase, but from year to year, they go down as well as up. We can hope that the increase in the tax due will be outweighed by an increase in company dividends.

Where you do have control over a company, it may pay to think more carefully about the dividends that are voted, and to whom, particularly if your income means that you are close to a threshold for the tax bands. It can also make sense to swap some of the dividend for a pension contribution – particularly if you are over 55 and you can take a tax free lump sum from your pension at any time, so the company can pay money into the pension, and you can then quickly withdraw it. You will need the right sort of pension to be able to do this, so it might be a good opportunity to review your existing pension plans.

There are some other tax-efficient investments you can make, and tax-efficient giving can also help you to save tax. As always, we’ll be happy to discuss this with you and work with your accountant to identify ways to help you benefit from your hard work.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner

This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

The favourable tax treatment of ISAs maybe subject to changes in legislation in the future.

The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested.

The taxation of the investment is dependent on the individual circumstances of each investor, and may be subject to change in the future.

The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.

Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future.

A pension is a long-term investment and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances.