Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
The simple planning tip that could save you over £1,000
When it comes to building a retirement portfolio, there are rarely any no-brainer decisions.
Deciding how to split investments between your SIPP and your ISA, for example, will depend on a number of factors, not least how readily you need to be able to access the money.
And what do you do about the day-to-day running of your fund? Should you pick shares and bonds yourself or pay a professional to do it for you?
Then there’s the question of picking fund managers (for those who choose to go down this route). Is ‘active’ worth it or is it best to minimise costs – one of the few things you can exert at least some control over – by investing in passive or ‘tracker’ funds?
Such decisions are not easy and require you to weigh up a multitude of factors based on your own income needs and personal circumstances.
However, as the 2017/18 tax year-end approaches there is a simple planning tip that could save you over £1,000 in 2018/19.
WHO DOES IT AFFECT?
If you have any investments held outside traditional tax wrappers, this could be relevant to you.
While dividends and investment growth in products like SIPPs and ISAs are tax-free, money held in interest-paying bank accounts or dealing accounts is subject to strict Government limits before you start paying tax.
At the moment, the dividend allowance is set at £5,000. So if you have a portfolio of investments in a dealing account worth £100,000, provided your total dividends for 2017/18 don’t exceed 5% you won’t pay any tax. Someone with £50,000 held in a similar account would be able to enjoy tax-free dividends of up to 10%.
Chancellor Philip Hammond has decided this is far too generous, so from April the dividend allowance will be slashed to just £2,000 a year – a whopping 60% reduction.
The tax rates that apply to dividends over this limit are particularly harsh. If you’re a basic-rate taxpayer you’ll face a 7.5% charge, while for higher-rate taxpayers it jumps to 32.5% before rising still further to 38.1% for additional-rate taxpayers.
In pounds and pence, a basic-rate taxpayer who is paid £5,000 in dividends in 2018/19 would be £225 worse off if the investment is held in a dealing account. This increases to £975 for a higher-rate taxpayer and £1,173 for an additional-rate taxpayer.
You can dodge this charge simply by moving your money into a tax wrapper such as an ISA or a SIPP. However, there may be capital gains tax to pay when you sell investments in a dealing account.
Tom Selby, senior analyst, AJ Bell