Investors have been dealt a massive blow in the Budget on news that dividend allowances will be more than halved to £2,000. That is the amount of money you can earn tax-free on investments held outside of an ISA or self-invested personal pension (SIPP) and over and above the £11,000 personal allowance level.

Many investors won’t be affected by the changes if they only hold their investments in an ISA or SIPP as income inside these wrappers is tax-free.

The changes are relevant to investors who have investments outside of an ISA or SIPP. You can earn up to £5,000 income from these investments tax-free each year under current rules.

You also need to consider that everyone in the UK has a personal allowance enabling them to earn up to £11,000 tax free each year.

So you only start paying tax an income from investments once you've used up the £5,000 dividend allowance and the £11,000 personal allowance.

Chancellor Philip Hammond says the rules will change. The £5,000 dividend allowance drops to £2,000 from April 2018; and the personal allowance will rise to £11,500 from April 2017.

Anyone earning 4% annual income on investments would need their portfolio (held outside of an ISA or SIPP) to be worth £50,000 or more to breach the dividend allowance level and start paying tax, for example.

It is a stark reminder to always use your ISA allowance each year to maximise tax benefits. The ISA allowance moves to £20,000 from 6 April 2017.

The Government says 80% of ‘general investors’ will pay no tax on dividends under its new proposals. (DC)

INFLATION COULD WIPE OUT RETURNS FROM NS&I BOND

The Government has confirmed the new NS&I savings bond will pay 2.2% a year over a three-year term. In reality it is worthless when you take into account inflation expectations.

The Office for Budget Responsibility (OBR) forecasts inflation will hit 2.4% in 2017, falling to 2.3% in 2018 and 2% in 2019. Therefore there will be negative ‘real returns’ on the bond in the first two years if the inflation rate estimates are correct.

The savings product launches in April 2017 and you can invest between £100 and £3,000.

There were some more positive headlines from the OBR. It now expects the UK economy to grow 2% rather than 1.4% in 2017 although sees growth slowing to 1.6% in 2018, against a previous forecast of 1.7%. (TS)

‹ Previous2017-03-08Next ›