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The trend of change
can give an insight into the future

The move to a living wage

This budget proposed a raft of changes with the media focus ending on the issues around the move to a ‘living wage’ and the ending of working tax benefits for the lower paid. Although the idea that companies should pay their employees properly is generally welcomed, especially considering that a number of companies are not paying much tax in the UK in the first place, concern remains around whether Mr Osborne is able to deliver a smooth transition.

Politicians from all parties have been talking about rebalancing the economy from service sector to industrial production and export. Reducing corporation tax, making pensions more attractive and making a start on cooling the buy to let sector would all encourage investment into real businesses. It will be interesting to see how these trends develop in budgets and treasury announcements to come.

Reducing the effects of rising tax bills

The attack on dividends sends a slightly mixed message in that it hits investors in large dividend paying companies quite hard. The effects will be felt by many investors that use equity dividends from individual stocks and income funds to help support their lifestyle in retirement. People with incomes up to the high rate threshold could see their tax bill rise by as much as £2000 per person per year and those above by even more.

There are a number of methods to try and reduce the effect of this. Firstly continue to use the annual ISA allowance as income from ISAs is not taxed.  Secondly, if you are still exceeding the new £5,000.00 Dividend Income tax allowance you should consider transferring equity holdings to your spouse to use their ISA, dividend income and capital gains tax allowances. After that things become slightly more complex.


A change of investment strategy

A change of investment strategy to more growth orientated investments with lower or even no dividends could help. Few investors regularly use their annual Capital Gains Tax allowance of £11,100 [2015-16 tax year] This would allow you to sell £11,100 of capital gain plus the associated capital. For example, if you invested £100,000 and it had grown to £111,000.00 you would still be able to access the whole amount without paying tax. It is increasingly important to keep good purchase price data to help manage the tax allowances on a portfolio. Those people who are still holding share certificates should consider placing their holdings onto a platform, the ease of administration, during and post lifetime will be worth the cost before you consider additional benefits such as dividend collection, security and tax planning.

Finally, using Capital Investment bonds will help higher rate tax payers reduce their income tax bill. These investments offer little by the way of tax saving to basic rate tax payers, unless it is for Inheritance tax purposes, as the investments are taxable within the structure. High rate & additional rate tax payers can defer tax till later in life when personal circumstances or the tax rules may be more beneficial. Income from this type of investments is limited to 5% per year of the original investment which is fine in the early years. However, it leaves little scope to generate the inflation beating increases in income possible from a dividend income strategy. An increase in your income is important as you reach further into retirement as the cost of living rises. These products are still often sold with initial charges as high as 5% and/or exit penalties when you most need access to your capital.

The trend of change

The trend of change is very important. In this case I hope that the UK government does not follow America. Our experience with US stocks shows that US companies offer lower dividends because the tax regime is not kind to investor taking dividends and therefore companies do not share their profits through dividends and instead investors often have to sell assets in order to derive a benefit from their investment.

If you feel that these proposed changes are going to affect you in the future, you should contact a suitably qualified investment adviser.

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