10 Mar 2017, 6:14am
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  • The taxman is coming for your dividends – ISAs are the main defence

    Young ‘uns know this already, but there are a lot of older folk who swear by share certificates and shouldn’t. My Dad was one – wouldn’t touch this newfangled nominee account rubbish when it was introduced 1. The trouble with certificates 2 is you eschew any kind of tax wrapper, which seem to be nominee only. There’s a bit more pressure on these refuseniks now because the taxman is coming for your dividends in a big way. Once upon a time, if you had dividend income that wasn’t greater that the higher-rate tax threshold 3 you could get it all tax-free. Well, last year they pulled that down to £5k a year. And from roughly this time next year it’s coming down to £2000, all due to the Budget.They are clearly after unwrapped dividend income, largely to stamp out the practice of self-employed directors paying themselves a token wage and then a massive amount in dividends. It’s worth noting that the tax on dividend income is still much lower than the tax on actually selling your time for money to an employer, 7.5% (update – I misrepresented the total here – PJ’s comment sets the record right on the need to account for corporation tax too in the case of the self-employed, though not the dividend-income shareholders) as opposed to 20%, but it’s a book-keeping nightmare for people who hold individual share certificates or people who hold unwrapped equity holdings on many platforms 4.

    Most dividend yields aren’t usually much more than 5%, so this means that you are sort of okay with up to ~£40,000 worth of shares, but why take the risk? Get your shares into an ISA 5 – and you have until 5th April to take action this year to bed-and-ISA some of these suckers. But be warned of capital gains tax, so don’t crystallise gains of more than £11k a year. If you need more than that you can do other stuff, like use your SIPP and you can also give shares to your spouse, but whatever you do do it, and do it now and early next year.

    I had a CGT gain that it’s taken me the last few years to run out into an ISA. Next tax year is my last crack at that sort of game, after which all my equity holdings will be in ISAs or SIPPs. I will still retain the empty unwrapped account if it doesn’t cost me anything. After all, you never know, we may be due for another market crash, and if I start thinking along these lines, and can raise the cash, and have the cojones, I may be grateful for more than £20k equity purchasing capacity that year. Then I will take the time to chunter that into the ISA over the following years.

    From a capital gains point of view, even if you want to maximise your ISA savings, you may be better off crystallising the existing gain in unwrapped holdings of Company X and investing 20k of the same shares in Company X in your ISA, even if it means you buy 20k worth of some different shares of Company Y unwrapped 6, because that resets the CGT clock on the unwrapped holdings. Some platforms give you a better deal on costs if you bed and ISA – TD, who I used, is one of them. But if you have share certificates then don’t putz about with that for this tax year – you usually have to get your share certificates into a nominee unwrapped account and then do the Bed and ISA from that. It’s very likely you just haven’t got enough time for the Crest forms to go through in time for this tax year end.

    You have three tax year end periods before you get hit with this – 2016/17, 2017/18 (after which the cut to 2k will happen, due in 2019) and 2018/19, so get with it.

    Listen to what’s written between the lines

    The chancellor is quite right, in that the self-employed white van folk have been playing merry hell 7 with the tax and NI system compared to PAYE employees. Last year I paid a whopping £150 to buy a year’s worth of State Pension accrual – that’s something that used to cost me thousands of pounds a year as a PAYE grunt. It’s easy to attack that sort of loophole, which is why the next tax year is the last year I will get such a good deal. I am chuffed that it is my 35th year out of 35 needed and I shall pay my £150 Class 2 NI contributions with alacrity for one last time for tax year 2016/17.

    distribution of the rise in class 4 NICs across the income spectrum (Resolution Foundation)

    But the self-employed also take the piss in another way, and that is the ‘company director’ who pays himself a pittance wage with the majority in dividends. These were the guys who were targeted by last year’s dividend tax allowance of £5000, but the tax paid is only 7.5% relative to he PAYE grunt’s 32%. As a higher rate tax payer you’re up to 32.5%, which is still a better deal when I was paying 41% (nowadays 42%) tax on PAYE when I was younger and hadn’t discovered what pension savings are there for.

    But there’s another bunch of NI mickey-takers out there, and yes, there’s a mustelid of white pelt in there too. These are the people living on a pension. There is no NI to pay on a pension, and somehow what with all the talk of fairness and the fact that Britain’s true tax rate is about 32% for basic rate taxpayers rather than the headline 20% I can see that changing in not very many years hence. First they came for the self-employed…

    There’s probably a lot more tax win to be had among the self-employed. Not the ‘self-employed’ Deliveroo drivers on zero hours contracts, it’s the “company directors” paying themselves and their wives in dividends. You gotta follow the money, and that 7.5% dividend tax level starts to sound far too low for future years, too. The Deliveroo guys don’t pay themselves in dividends, it’s the well-heeled self-employed that are in the Chancellor’s gunsights here.

    Saving equities in the uncrystallised part of my SIPP is a small way to fight back?

    One of the ideas I thought if I wanted to hold non ISA shareholdings is – what if I hold them in the uncrystallised part of my SIPP? Say I hold £1000 of Megacorp paying 10%. So I put 1000 into my SIPP and the taxman makes this up to £1250. Megacorp pays me 10%, ie £125. I drift this £125 off to my crystallised pot. Because I will always be a BRT taxpayer soon because of other income, I get to pay 20% tax, ie  £25, ending up with £100. Bugger. But on the other hand, without going through this I’d have only got 10% of £1000, which is, drum roll… £100.

    Now if I’d held that in my unwrapped trading account, and accumulated enough to pay tax on it then I get to lose 7.5%, ie end up with £92 from Megacorp p.a. I don’t have a huge need for my SIPP once my main pension starts paying out. I will save my £2880 p.a. to get my 25% boost from the taxman up to £3600. On 75% which I get to pay 20% tax, boo, hiss, but it’s still worth it, because £720-£540=£180, which is a 6.25% guaranteed ROI for two months of a year, and where the hell else are you going to get that on cash these days?

    But if for some reason I had money coming out of my ears and a 20k ISA limit was not enough, I could get a £2880 increase on that by misusing my SIPP. People who are working can do better than that, provided they become basic rate taxpayers in drawdown. Beats holding it all unwrapped and no need to sweat capital gains. If Megacorp goes up 100% I get to pay tax on the price if I sell, but hell, I bought 25% more of it at the lower price because of the taxman’s bung. The uncrystallised portion of my SIPP looks like an interesting place to hold equities after my ISA compared to an unwrapped trading account. On the downside, the potential 32% tax and NI merger could gut the value of doing that.

     

    Notes:

    1. he was a canny old boy in many ways – when he retired in the mid 1980s and the company retirement FA suggested he used unit trusts for diversification the FA got sent off with a flea in his ear because the fees on the suggested unit trusts in those days were absolutely huge. But he didn’t get PEPs or ISAs later on
    2. There are some advantages – your cost of carry is zero, and you are less likely to turn over your portfolio because of the aggravation
    3. if you had no other income
    4. if you hold loads of shares on one or two platforms each platform gives you a consolidated tax certificate for the dividends across your entire portfolio which makes the job of reporting the dividend total a lot easier
    5. If ISAs aren’t enough to contain your vast wealth then I guess you are probably rich enough to use offshore tax havens and find suitable advice 😉
    6. Or you leave it a month before you rebuy Company X
    7. they get less too, they don’t accrue entitlement to contributions based Jobseeker’s Allowance

    It’s mildly amusing seeing these new Teflon Tories flexing their tax talons on realising there’s no real opposition. Now that only their natural electorate have any money left, they have little choice but to parasitise them with a few gentle lovebites they hope will go unnoticed …..a few drops here & there, testing, testing. How loud does the squealing register when the trough is eased away? Anything under 30 decibels should be inaudible what with the background noise of modern-day life, gently does it 🙂

    First they gently reined in the party that was buy-to-let, now they’re sniffing around chisling away via small business taxes & dividends, checking for a reaction …..& if the host notices & doth protest too much, they May back off a little, water it down, come back when you’re sleepy. Bedbug patience.

    They’ll keep up the divide & rule though, with weapons of mass distraction, like preying on the vulnerable [keep turning the ratchet on the young, sick, unemployed, poor, otherwise SOL] …..’til their eyes pop out of their little sheepy heads. Then enough mainstream media outlets will remind those who still have money that it could be worse, you could be like those effectively disenfranchised by not being able to afford your rights. So you’d better keep quiet, you don’t want to be all in this together now, do you?

    I see there are signs of dithering/appeasement, though not in substance 😉

    Long time reader, first comment! I am always amazed when I speak to people buying shares outside of an ISA, I’ve manage to convince a few colleagues to move their accounts over to an ISA in the last few years but people really don’t seem to see what the benefits are, and the impact of use it or loose it allocation each year.

    For a single director Ltd company, It’s worth clarifying that to get a dividend out of their Ltd company it has to make a profit. This profit is taxed at 20% corporation tax, the dividend is then taxed at 7.5% personal tax. The total tax paid to HMRC is 27.5% to get the money into a personal account vs the PAYE 32%. Yes it’s better than PAYE but not 7.5% vs 32% better.

    Due to redundancy I’ve found myself in this Director position as the majority of companies in my industry are only hiring people as contractors rather than PAYE employees (it’s not all white van men). It costs companies the same total money per person (PAYE employee/contractor) but gives them complete flexibility on turning resource on and off at the flick of the switch. You definitely end up with more in your pocket as a contractor but at the loss of sick pay, holiday pay, company pension contributions, no redundancy pay when the contract is terminated and no chance of claiming unemployment benefit. By the time you’ve put provisions in place to cover those things I’ve found it’s pretty much a level playing field slightly skewed in the favour of contracting as long as you don’t get a serious illness putting you out of work.

    It’s all swings and roundabouts, in both scenarios you do what you can to minimise the tax you pay. It’s hard to know how they level the playing field as they are trying to do. For those that are exposed to a lot more risk as they aren’t PAYE it needs to be favourable whilst also tackling the cash transaction economy where things can fly under the radar.

    Interesting, thanks for the correction! I’ve only ever sold pure mind as a freelancer so I didn’t pick this up because pretty much all earnings were income – my bad. I just declare all earning as income but nowadays I make sure I don’t earn more than the personal allowance 😉 Years ago I used a Ltd co and the accountant did his magic, but it was web design so again selling mind rather than capital-intensive products/services.

    I had this very discussion about ISAs with people at work, they didn’t see what the advantages were in the old days of the tax credit voucher, well for basic rate taxpayers. I can imagine a few of those guys are rueing the day now!

    10 Mar 2017, 1:19pm
    by kevin lally

    reply

    Second the comment about the true total comparison being 27% vs 32% for BR taxpayer. HOWEVER the difference to HM Treasury is the 13% Ers NI which is paid (by the employer, duh!) and invisible to your comparison, vs nil under the divi route.
    At HR, there is a similar gap.

    The direction of travel is clear: the chancellor is increasingly trying to clamp down on non-employment models as some sort of tax haven, and has been doing so for a number of years.

    The “traditional” contractor model of Ltd Co, minimum salary (c£10,000) and dividend route remains still quite attractive, especially where a non-working spouse can participate via shareholding in the company. It gives the opportunity to take advantage of two sets of personal allowance and BR tax, and also preserves the ability to access Child Benefit for much longer.

    I have in the past sold pure mind as a contractor – it was a no brainer at the time. (sorry I couldn’t resist the turn of phrase (or smugly pointing it out!)), but there is a much more balanced debate around the merits of working under employment or contractor model now.

    I still see the contractor (/freelance) model as a cultural goal for a lot of progressive companies, with this tax issue a mere hiccup on the journey. There are a huge number of people with specialist skills required by companies but not on a full-time or long term basis, and which hitherto have been fulfilled by buying in via “traditional” consultancies. If I were a progressive buyer, and wanted some modicum of control over selection of worker bee and to QA the output, I’d rather choose a £500p/d professional (one man band) consultant over a £1200p/d identical person from a larger consultancy firm.
    As an individual, this is clearly a more bumpy journey in cash, workload and planning terms. I would want compensation for this risk, but believe that this form of compensation should be in the price demanded to the client, rather than in the advantageous tax treatment.

    By all means, if NI were hypothecated to go towards the NHS (god bless ’em), unemployment benefits, and state pension, then I would be happy if there remained a differential NI rate for those contractors /freelancers unable to access the full suite of these benefits (maternity leave, sickness pay being the obvious ones). However we have long since pretended that NI actually is directed at these ambitions, and so the argument about differential NI approach is diminished.

    this form of compensation should be in the price demanded to the client, rather than in the advantageous tax treatment.

    ^ This

    The trouble with the self employment regime seems to be it’s the government subbing the companies by making this cheaper for the freelance service providers. That flexibility should come at a price, it benefits the customer by not tying up their money in a standing cost. They should be prepared to pay more for it, rather than the same amount and have the advantageous tax treatment pick up the slack.

    For some people self-employed is right, but not at the bottom end of the scale, and this tax anomaly seems to be driving a boost in fake self-employment at the bottom end.

    actually NI is hypotheticated, see https://en.wikipedia.org/wiki/National_Insurance_Fund, its just the fund is always in surplus, and the money is ‘lent’ to pay for other general spending

    Although I benefited hugely through the NI loophole of pension salary sacrifice (both as a contractor with an umbrella company, and as a real employee for a small company who agreed to my ‘unusual’ contract of employment, I always felt it was tax avoidance. But unlike the BBC, I know avoidance is legal, evasion is not.

    10 Mar 2017, 1:22pm
    by kevin lally

    reply

    Sorry – last sentence “long since stopped pretending that NI is directed…”

    Apologies. I was getting too worked up about it all as I typed, and my frothing at the mouth distracted me.

    When I was a contractor for IBM I used an umbrella company. No need to run your own company and pay accountants etc, the umbrella were very happy to handle expenses and salary sacrifice, and I felt I had a little protection from HMRC and indemnity claims. I expect many contractors are winding up their companies now in favour of umbrellas.

    While there is loads of NI bleating, I don’t hear much dividend bleating, though the extra tax is much the same. Much smaller pool of people I guess.

    I suspect the problem is that if people have been been too slack to shift those certificated shares into ISAs they haven’t realised what’s coming to hit them yet. I got on my mother’s case last year, she holds cash ISAs for gawd’s sake, the cash ISA has no reason to exist in today’s world other than as a receptacle to jump your unwrapped shares into. You need a lot more cash to run foul of the 5k interest limitations than you need shares to run into the existing 5k cap at current interest rates!

    Its 1k for interest, but certainly the dividend and CGT protection are better for shares. Of course when the Innovative Finance ISA comes in the situation will reverse, with those 10% p2p returns.

    Oh boy, another error – and I actually knew this – thanks!

    Not too long ago a company director could limit tax to 0% personal (20% corporation) by paying him/herself around 8K and around 29K in dividends. Further remuneration could then paid into a pension. Very low tax overall. There does need to be some benefits for company directors who employ people.

    I confess I was under the fond impression company directors set up companies with the aim of increasing value to their customer base, accruing the profits from such activity and profiting from the increased value of the business, rather than as a tax avoidance strategy.

    I’m not sure I recognise the narrative of the for-profit company as a charity designed to provide employment and deserving of favourable tax treatment from that perspective alone. While (true) employment is good and a social service, the quid pro quo for the grunts of not taking the risks is that they generally don’t capture the increased value of the company unless they hold shares.

    Pre-pension retirement plans suffer another blow. As commented above by John B it is amazing how little complaint there is to the allowance cut for regular dividends. A drop in any allowance by over £40k in three years is surely the tax grab of the century – but I assume nobody understands the old tax credit sleight of hand and most comments I have seen seem to view the £5k allowance as a new tax free bung, rather than a swingeing cut for basic rate payers.

    Of course the other half of the comments are full of the politics of envy – anyone affected has got too much money anyway, so shut up, kind of comments. Yes, it is true, and it is also true that 7.5% is better than 20%, but it is still a fact that two years ago it was zero, on a lot, especially if like me you have no other income. I am now paying 7.5% on nearly £15k of dividend income, and soon will be paying probably 10% (next year’s prediction!) on £18k. Before 5 years are out it will be 20% I am sure, then the raid on ISAs will start, as non-headline tax rate targets get fewer and fewer.

    It won’t kill me, but after planning for 10 years for a certain income on pre-pension retirement it isn’t fun!

    Yes, ISAs are there to be filled, but I do that already and it takes a while, albeit not as long as a few years ago, to get a proper income generating amount into them, and as a non earner only getting £2880 into a SIPP whcihwill be taxed on exit anyway is hardly worth the effort. Most of my SIPP was filled when I was a HR payer.

    What I will have to do is get more focused on swapping dividend payers for non div payers inside my ISAs, as well as the new money.

    PS – I am again writing my MP highlighting the real value of the change for non directorship dividends, for what good it will do, which is none.

    I think the torygraph’s healdine “A tax on widows” was a decent stab at highlighting the hit on BRTpayers. Surprised people think of the 5k dividend allowance as an extra bung, that was a smart piece of selling by Osborne.

    Clearly favours dividend payers in an ISA, I am starting to ask myself why I hold gold ETFs in the ISA, I could boot these guys out into the unwrapped account and give myself more room. Would have to watch the CG as inflation bites, though, and swap gold ETFs to crystallise that.

    Yes, I have the same issue with a boatload of Imagination shares held in my ISA, about £40k worth generating no income. I doubt they will see halcyon days again, so may be time to sell and move to more divi payers. CGT harvesting is a bit of a pain when you have a large portfolio, but as you can offset losses it has worked well for me lately.

    13 Mar 2017, 5:42pm
    by The Rhino

    reply

    ‘Surprised people think of the 5k dividend allowance as an extra bung, that was a smart piece of selling by Osborne.’ – Indeed, it was so widely reported as such I still have a hard-time reminding myself how it left me worse-off. Much as I hate Osborne, he did a very good job there at conning the media and in turn the public..

    12 Mar 2017, 2:39pm
    by Spud Potatoes

    reply

    Ermine – from your 7th paragrah “As a higher rate [self-employed] tax payer you’re up to 32.5%, which is still a better deal when I was paying 41% (nowadays 42%)” – you’re forgetting the 32.5% is after the 20% corporation tax, i.e. so it’s 32.5% on £80, so £100 gross becomes £54 after taxes, or effectively a total tax rate of 56%. Admittedly, the corporation tax rate is coming down, but not enough to make that much difference. And that’s before additional charges for VAT.

    That’s a fair point on CT, I am showing my life as a PAYE grunt there! VAT is a moot point, when I had the multimedia company I was charging VAT, but the customers were businesses so it didn’t particularly hurt them, they reclaimed it. I guess there are self-employed B2C firms where VAT is a hit on profitability, but it’s no different from the hit on a firm’s profitability that directly employs staff.

    no one likes a tax hike, but the dividend rates did seem a bit generous?

    I’m finding it hard to get too irate, although mucking about with the 5k – 2k limit looks incompetent as it was so shortlived

    it has to be balanced against the *massive* increases in ISA allowance which is great.

    I think CGT has also been lowered as well right.

    All in I don’t think UK tax is too onerous, especially if you’re only stream isn’t income

    If they scrap sal sac I will be very sad though..

    After each budget I’m relieved if the only hit is £300 p/a, other tax changes could be so much worse for us on edge of the economic mainstream. The high paid self-employed are bleating, but its the low paid who are being shafted, as the abolition of Class 2 means they won’t get their 1/35 of a pension unless they pony up 700 p/a. See http://paullewismoney.blogspot.co.uk/2017/03/lowest-earners-face-biggest-nics-rise.html. Of course this might be fair for the self-employed with play businesses, as some FIRE people might be, but I’ve not thought that through.

    Of course this might be fair for the self-employed with play businesses, as some FIRE people might be, but I’ve not thought that through.

    Hehe – that’s me 😉

    When I think back to the thousands of pounds NI a year I’ve paid on PAYE on which they docked my SP entitlement for being contracted out it felt particularly good to stick it back to them buying these added years, effectively an extra £207 p.a per year for…£147. The value of my PAYE NI contributions stank, but the class 2 were a steal. I suspect I will only get three years worth of that in total, but I really, really, need to give up this token working lark by April 2018 anyway. I aim to pack it in about September, which gives me another year of Class 2 for 2017/18.

    I never understood the contracted out deduction. My forecast shows that I’ve 28 paid years, a forecast of £129p/w and a COPE deduction of £34.08, fair enough, as I was contracted out privately and as a civil servant for much of that. But 129 is 29/35ths of 155, so there doesn’t seem to be any place that the £34 is being deducted. So I’ve no idea if I will actually get £129 or £95, or whether if I buy 7 more years I’ll get £155 or £121

    I read this as you get 129 p/w and your works pension should pay you 34.08 as part fo the win from contracting out. So you are one of the lucky devils who can do better by having contracted out, by making up your NI contributions. this example seems to indicate the gov gives her 135pw and the COPE is 20 pw, though the estimate was revised down when the actual figures came in. I would hope that a year later they have got the actual figures from the contracted out schemes into the results, since there isn’t any contracting out any more.

    Mine is 141.13 for 34 years (they haven’t registered last year though I paid last April). It would be 151.20 if it were a straight scaling of 155.65 by 34/35. I figure another 2 years of Class 2 NI at ~£150 p.a, this TY and next. should nail it. I am another lucky devil who saved on NI while working but can still get the full works with the changes

    Even at the normal poor self-employed price of ~£700 the state pension si a terrific deal. It’s an annuity accruing an extra ~£230 a year at a cost of £700, about a 33% annuity rate. I ran an annuity quote for myself, payable at 67, inflation-linked, single life and the annuity rate is about 3.2%. The state pension is fantastic value as an annuity, you run, not walk, towards that sort of deal. Whereas when I was on PAYE I was getting an effective annuity rate of 6-7% on the SP. Still better than on the open market, but not the absolute steal the self-employed are getting. OK, so NI is supposed to be for other things than the SP, but I look at my PAYE NI record and figure the self-employed got a great deal in comparison!

    I think the website is muddled, as the NI contribution page goes up to 15/16, but the forecast page assumes you will have paid for 16/17. Hence I had 28 years up to Apr 16, but the forecast is a 29/35 ratio. I suspect the lack of COPE reduction is because the old rules were based on 30 years, so 28/30 of a contracted out old rate was more than 29/35 of the contracted out rate under the new rules, and you get the better deal, and the headline figure is what they pay. Either way, paying £689 for an extra year is still a good deal, but I’m got to wait until the 2019 deadline just in case something changes.

    NI is certainly a funny scheme as most people pay far more than you need for a year’s credit. Also I’ve been told I paid 148 one year, and need to top up by 357 (ie 505 total) and paid nothing the next, and need to top up by 689. Perhaps that’s because my employer paid 172 the first year, and when you top up you have to pay both parts

     

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