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The dividend allowance cut – what can you do to shelter your income?

Invested in income-paying shares? Here’s why you might want to think about moving your existing income-paying shares into an ISA or SIPP.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

UK companies have paid out £1.18tn in dividends in the last 15 years. That’s more than half of the market capitalisation of UK shares right now.

The fourth quarter was 2023’s strongest quarter with payouts jumping 15.6%. The top FTSE 100 dividends saw faster underlying growth than mid-cap companies in 2023 – 6.2% against 1.0%. And the banking sector became the UK’s biggest dividend paying sector for the first time since 2007.

Growing dividends are what every investor likes to see, but it’s not all good news. The dividend allowance is set to be slashed in half next tax year.

We’re currently expected to pay £17.6bn in income tax on dividends this tax year. And it’s very likely this figure will increase when the dividend allowance is cut to £500 on 6 April – it means anyone earning more than £500 in dividends will see their tax bill go up.

So, what else can investors do to shelter their gains?

This article isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice.

For a lot of people Share Exchange might be an option worth thinking about.

How to shelter your income-paying investments

ISAs are celebrating their 25th birthday this year. They’re easy to understand, flexible and best of all, free from income, dividend and capital gains tax (CGT).

If you already hold dividend-paying shares or funds, Share Exchange lets you move these and other investments (like Exchange Traded Funds and Investment Trusts), from your HL Fund and Share Account to an HL Stocks and Shares ISA, or Self-Invested Personal Pension (SIPP). Once inside, they’re sheltered from UK income and capital gains tax.

Selling your original shares to make this move may trigger CGT and the investments you move into an ISA or SIPP will count towards your allowance on either product. Shares are free to hold in a Fund and Share account but charges apply within an ISA and SIPP. View further details on charges.

All future dividends will go straight into your ISA, without using up your annual allowance and without having to worry about paying any more tax on them. You can even reinvest those dividends to buy more shares, compounding their value, and the value of your dividends.

Remember, all investments, and any income from them, can rise and fall in value. So, you could get back less than you invest. No dividend is ever guaranteed either.

Moving your shares to a pension, like a Self-Invested Personal Pension (SIPP), can also be a good option when saving for your retirement. It has similar tax benefits to an ISA, as well as offering tax relief on any money UK residents under 75 pay in. Although you can’t usually access money in a pension until you’re 55 (rising to 57 from 2028).

ISA, pension and tax rules can change and their benefits depend on your circumstances.

Online Share Exchange deadlines – 2023/24 tax year

ISA shares

2pm, 5 April 2024

SIPP shares

2pm, 3 April 2024

Past performance isn't a guide to future returns.

Find out more about Share Exchange and how it could work for you ahead of the end of the tax year.

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Article history
Published: 27th February 2024