Page 5 - Budget Newsletter 2021

The Dividend Allowance

The dividend allowance also started life in April 2016, originally at a level of £5,000 before it was reduced to the
current £2,000 which remains unchanged for 2022/23.

The allowance means that, in 2022/23, the first £2,000 of dividends you receive is not subject to any tax in your hands,
regardless of your marginal income tax rate. Once the £2,000 allowance is exceeded, there is a tax charge, the rate of
which will increase by 1.25% for 2022/23 (please see the table below). Like the PSA, the dividend allowance is really a
nil rate band, so up to £2,000 of dividends do not disappear from your tax calculations, even though they are taxed at
0%.

DIVIDEND TAX RATES

TAX YEAR BASIC RATE HIGHER RATE ADDITIONAL RATE
2021/22 7.50% 32.50% 38.10%
2022/23 ONWARDS 8.75% 33.75% 39.35%

The pandemic prompted a wide range of companies to reduce or stop paying dividends in 2020. Many companies
have since restored their dividend payments, albeit some have taken the opportunity to ‘rebase’ (i.e. cut) their pay
outs. The current historic yield on UK shares is now around 3.2%, which means, in theory, a UK share portfolio worth
more than about £65,000 could attract additional tax on dividend income, even for a basic rate taxpayer.

The Starting Rate Band

The starting rate band for savings income was launched at £5,000 in 2016/17 and at a tax rate of 0%, and will remain
on that basis for 2022/23. Sadly, most people are not able to take advantage of the starting rate band: if your earnings
and/or pension income exceed £17,570 in 2022/23, then that probably includes you. However, if you (or your partner)
do qualify, you will need to ensure you have the right type of investment income to pay 0% tax.

PLANNING POINT

If you don’t anticipate using all your personal allowance or PSA in the current tax year, think about creating
more income by closing deposit accounts before 6 April and crystallising the interest in this tax year. But beware
of early closure penalties and shutting down accounts with better interest rates than are available now!

For 2022/23, consider who should own what in terms of investments and savings. The savings and dividend
allowances mean it is not simply a question of loading as much as possible on the lower rate taxpayer of a
couple. In theory, you will each be able to receive an income of up to £20,570 tax free in 2022/23, but only if
you have the right mix of earnings, savings income and dividends.

Capital Gains Tax (CGT)

CGT was a tax which attracted the Chancellor’s attention last year when he asked the Office of Tax Simplification (OTS)
to review the operation of the tax. The OTS’s first report was published in November, but the Chancellor made no
mention of it in his March 2021 Budget, deciding only to freeze the annual exempt amount at £12,300 until the end of
the 2025/26 tax year. A second report emerged from the OTS in May, dealing with technical issues. However, the
Chancellor chose not to announce any significant changes to CGT, suggesting that reform may now be off the agenda.

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