It’s time to get back into equity income funds

THE Government’s decision to add 1.25 percentage points on to the dividend tax rate has implications for many investors who are seeking income through dividends.

While everyone is allowed to receive £2,000 of dividends a year tax free, after that the dividend tax rate is 7.5 per cent for basic rate taxpayers and 32.5 per cent for higherrate taxpayers.

This will rise to 8.75 per cent and 33.75 per cent respectively in April next year. It means basic rate taxpayers will pay £263 in tax on £5,000 of dividend income – up from £225 – while higher rate taxpayers will pay £1,013, up from £875.

This means that those who receive dividends through income friendly funds should be locking as much of their investment away into taxfree wrappers as possible. Dividends paid when investments are held in either pensions or Isas are free from dividend tax and do not count towards the £2,000 annual allowance.

Currently, everyone can pay £40,000 into a pension per tax year – and £20,000 into an Isa. A ‘bed and Isa’ strategy, where you sell investments and then buy them back in a tax wrapper, can help you mitigate dividend taxes, while married couples should ensure they use both partners’ Isa and pension allowances to protect dividend payments from the taxman.