Uncovering the dividend allowance

What is the dividend allowance and how does it impact a decision to invest in dividend yielding assets?

March 2021

PART OF 30 MINS STRUCTURED CPD

10 MIN READ

Subscribe to our Insights

Risk Disclaimer

This content is directed only to persons having professional experience in matters relating to personal investment (investment professionals) and should not be distributed to anybody else. It has been prepared for general information purposes only. It does not constitute advice (whether investment, legal, regulatory, tax or otherwise) provided by BMO Global Asset Management (EMEA) (BMO). Certain content in this document is based on our own reading of legislation, regulation, or guidance issued by a government or regulatory authority, as at the date of publication, which is subject to ongoing change. Tax treatment is based upon individual circumstances. BMO gives no warranty or representation, whether express or implied, that such content is up to date, complete, or accurate.

Investment professionals in receipt of this document should not rely on any of its content. They remain solely responsible for advising their underlying clients in accordance with their own legal and/or regulatory obligations and for taking their own independent advice as they determine is necessary.

To the extent lawful, BMO excludes all responsibility and associated liability for any loss or damage suffered by any recipient of this document who chooses to rely on its content, whether occurring in contract, tort (including negligence), breach of statutory duty, or otherwise, even if foreseeable.

Key takeaways:

  • Understanding the dividend allowance
  • How to invest in dividend yielding assets without being affected by the dividend allowance
  • Why the dividend allowance is actually an income tax nil rate band rather than a true allowance

What is the dividend allowance and how does it impact a decision to invest in dividend yielding assets?

The landscape of taxation of dividends in the hands of individuals changed fundamentally on 6 April 2016 when the following significant changes to the taxation of savings income were made:

  • The dividend allowance was introduced
  • The notional (and non-reclaimable) 10% tax credit was abolished
  • The income tax rates applicable to dividend income were increased
  • The Personal Savings Allowance (PSA) was also introduced

 

The dividend allowance was initially £5,000 but is now £2,000.

There was a lot of discussion at the time about ‘“when an allowance is not really an allowance’”. That is to say there was some confusion initially about whether dividend income within the dividend allowance was taxable income or not.

It is of course taxable income, meaning that the allowance is really a nil rate band: income within the allowance is taxable but charged at 0%. The same applies to savings income within the PSA. Income charged at 0% is not the same as income that is non- taxable.

Download our full article where we review this distinction via a case study and explore how dividend income straddles the basic and higher rate tax bands.

Bank your CPD

Please answer the multiple choice questions below in order to bank your CPD. Multiple attempts are permitted until all questions are correctly answered.


Complete the course to claim your CPD

This article is part of a course. To claim your structured CPD, please complete the other articles in the course.

Risk Disclaimer

This content is directed only to persons having professional experience in matters relating to personal investment (investment professionals) and should not be distributed to anybody else. It has been prepared for general information purposes only. It does not constitute advice (whether investment, legal, regulatory, tax or otherwise) provided by BMO Global Asset Management (EMEA) (BMO). Certain content in this document is based on our own reading of legislation, regulation, or guidance issued by a government or regulatory authority, as at the date of publication, which is subject to ongoing change. Tax treatment is based upon individual circumstances. BMO gives no warranty or representation, whether express or implied, that such content is up to date, complete, or accurate.

Investment professionals in receipt of this document should not rely on any of its content. They remain solely responsible for advising their underlying clients in accordance with their own legal and/or regulatory obligations and for taking their own independent advice as they determine is necessary.

To the extent lawful, BMO excludes all responsibility and associated liability for any loss or damage suffered by any recipient of this document who chooses to rely on its content, whether occurring in contract, tort (including negligence), breach of statutory duty, or otherwise, even if foreseeable.

Other articles in this course