Shareholders Set to Receive Record Dividends

November 2017
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2017 looks to be a record year for dividend payments from UK listed shares. Shareholders in FTSE companies can expect a total payment of £94 billion, up 11% on last year, according to Capita.

Companies can only pay dividends when they make a profit. Profits are higher than usual this year for two reasons:-

Firstly, the weak pound has boosted the profits derived from overseas earnings. This is significant, as over 70% of the income earned by British companies listed on the FTSE, comes from trade outside of the UK. Income earned in dollars, euros and yen have all been translated into more pounds as sterling is weak against all these major currencies. (1)

Secondly, a number of companies have paid out profits, as one off dividends from higher than expected profits, rather than reinvest them in the business. 

Some commentators have criticised this move as a cynical attempt by directors to temporarily boost their share price, often linked to executive bonuses. 

Whether this is fair criticism or not, depends upon whether the business has retained sufficient cash flow and reserves to grow. 

Another reason one off dividends are being paid may have more to do with tax planning, currently shareholders can receive up to £5,000 per year of tax free dividends. From April 2018 that falls to £2,000 per year.

While shares held in an ISA or pension are not taxed, other investment in shares will produce taxable dividends if they exceed the allowance and if the owner has used their personal income tax allowance usually £11,500 per annum.

Those who have taxable dividends over £2,000 per year need to consider ways of tax sheltering this income before the tax free allowance falls to this level on 6 April 2018.

Here are some ways of tax sheltering future dividends:-

  • Invest the maximum allowed in an ISA of £20,000 per adult per tax year and £4,128 for under 18s. Dividends paid out by ISAs are tax free.
  • Pension plans and investment bonds may own shares and will remove the dividends from personal liability to income tax. Tax is paid on pension income withdrawn from the fund, but not while it rolls up.
  • Investment bonds, issued by insurance companies, also allow some tax deferral as the insurance company is taxed on the life assurance fund, creating a tax credit equivalent to 20%. Only higher rate taxpayers retain a liability, which is also deferred until withdrawals are made.
  • Offshore insurance bonds are exempt from UK tax but UK policyholders pay tax on withdrawals made but can defer the tax in the interim. 
  • Venture Capital Trusts (VCTs) enable dividends to be paid tax free. However VCTs, which also attract 30% income tax relief on the investment, are much higher risk than main stream shares, so you could get no dividend and lose all your money if the VCT fails. 

Before investing in a new vehicle remember selling shares may also create a capital gain. If this, after allowable losses, exceeds £11,300 then tax on the gain may be payable. 

Married couples or civil partners may gift shares to each other. This could be worthwhile if they have not used their own dividends allowance or are a lower rate taxpayer. Gifts of shares between spouses do not count as capital gains disposals.

If you have taxable dividends in excess of the current £5,000 allowance, this income will be taxed via self assessment.

Companies are no longer able to issue a credit for corporation tax already paid on the profit, so individual taxpayers need to report their dividend income over £5,000 before 31 January and set aside funds to pay any tax liability arising. 

Kay Ingram
Director of Public Policy, LEBC

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. Investments can fall as well as rise in value so you could get back less than you invest. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.

(1) http://m.citywire.co.uk/money/study-reveals-higher-proportion-of-ftse-revenues-derived-overseas/a716388

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