As a UK investor, the Autumn Statement means I have to be extra careful with my dividend stocks. If I want to avoid paying tax on them in future, I’ll need to keep an eye on which accounts they’re in.
Right now, investors like me benefit from a Dividend Allowance of £2,000. That means that I can receive £2,000 in dividends per year without having to pay tax on them.
From next year, that’s going to change, though. The Dividend Allowance will reduce to £1,000 in April 2023 and then come down to £500 in 2024.
There’s also an accompanying tax on capital gains. Right now, the Capital Gains Tax Annual Exempt Amount is £12,300.
In other words, the first £12,300 profit that I make by selling my investments is exempt from tax. But that’s going to come down to £6,000 in 2023, and £3,000 in 2024.
Right now, neither my dividend income nor my capital gains qualifies for tax. But if I want to keep it that way, I’ll need to be careful.
Taxes
For me, the change to the Dividend Allowance is more significant than the Capital Gains Tax Exempt Amount. There are two reasons for this.
The first is that, as an investor, I plan to keep my investments for long periods of time. I don’t plan to get rich by selling the shares I own, but by benefitting from the cash the businesses generate.
The second is that the dividend threshold is much lower than the threshold for capital gains. That makes it much more likely that my dividends will be eligible for tax than the money I receive by selling shares.
Stocks and Shares ISA
Fortunately, though, there’s a way to protect my dividends from tax. That involves keeping my dividend stocks in a Stocks and Shares ISA.
A Stocks and Shares ISA allows me to invest £20,000 without making my investments eligible for tax. If I invest it in dividend stocks, then any dividends I receive don’t count towards my Dividend Allowance.
I can also reinvest the dividends that I receive to grow my investments over time. The £20,000 allowance doesn’t include money that I receive from my investments and then redeploy.
That’s why I’m looking to make sure that my dividend stocks are all in my ISA right now. And I’m going to look to keep it that way moving forward.
Autumn Statement
According to the UK government, the changes will raise over £1.2bn per year in taxes. They also think that a fair tax system involves a greater contribution from people who receive unearned income.
Are they right? I don’t know, but it doesn’t really matter – my job isn’t to make the laws or to worry about how I think they ought to be different.
My job, as an investor, is to figure out the best way for me to make money through my investments. And right now, I think that’s by filling my Stocks and Shares ISA with dividend stocks.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
