Page 5 - Budget 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.

The allowance means that in 2021/22 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 of 7.5% (for
basic rate taxpayers), 32.5% (for higher rate taxpayers) and 38.1% (for additional rate taxpayers). 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%.

The pandemic prompted many companies to reduce or stop paying dividends in 2020. As a result, the historic yield on
UK shares is now around 3.05% which means in theory a portfolio worth more than about £66,000 could attract
additional tax on dividend income, even for a basic rate taxpayer. In practice, that threshold portfolio size could prove
to be smaller in 2021 as dividend payments should rise over the next 12 months.

The Starting Rate Band

The starting rate band for savings income was launched at £5,000 in 2016/17 and a tax rate of 0%, and will remain on
that basis for 2021/22. 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 2021/22, 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 2020/21 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 next tax year, think about 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 2021/22, but only
if you have the right mix of earnings, savings income and dividends.

Capital Gains Tax (CGT)

Capital gains tax was a tax which attracted the Chancellor’s attention last year. 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 Budget, deciding only to freeze the annual exempt amount at £12,300 for the
next five tax years.

Gains are currently taxed as the top slice of income, but the rates are lower than those that apply to income not
covered by allowances. Gains are generally taxable at 10% to the extent they fall in the basic rate band (£37,500 in
2020/21 and £37,700 in 2021/22) and 20% if they fall into the higher or additional rate bands. An additional 8%
applies to gains on residential property and carried interest. For 2021/22 through to 2025/26, the capital gains tax
annual exempt amount will be, as it is now, £12,300. The OTS report suggested the exemption should be cut to a ‘true
de minimis’ of between £2,000 and £4,000.

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