Tax Strategy (UK)

Paying tax is your legal duty, as your civic contribution for the goods and services the local and national governments provide. The range of taxes we pay is quite wide - almost anything we do incurs some kind of taxation.

However, a large number of tax allowances are available for savers and investors. One way of looking at these allowances is that they are intended as 'incentives' to encourage certain types of financial behaviour. It seems to me that, as good citizens, we should respond to these incentives where they are offered. In other words, tax avoidance is (almost) virtuous - helping the government achieve its objectives.

Having said that, the UK tax regime (probably like all others around the world) is complicated - and there have been recent changes in respect of married couples, savings and dividends.

Most investors will be familiar with ISAs and SIPPs, which offer significant tax benefits - shielding your investments from Income Tax and Capital Gains Tax. In addition we have annual personal allowances for Income Tax and Capital Gains Tax. (I have written extensively about this before: for example, here, here and here - it is one of the basics starting points for the DIY Income Investor approach)

Being married carries great tax advantages, including the ability to transfer assets between the couple and the recently-introduced ability to transfer some of the Income Tax Allowance from one partner to the other - via the Marriage Allowance: useful if one partner is not using their full allowance.

The new (from April 2016) personal tax allowances - as many readers will be aware - are:

• Savings allowance of £1000 of income (for basic rate taxpayers)
• Dividend allowance  of £5000 of income [NOTE: this has now been reduced to £2000]

Whilst the Savings Allowance has attracted most press comment, the Dividend Allowance is actually far more generous. 

These allowances mean that a married couple could have an income of £34,000 [now £28,000] without paying tax, made up of (for each partner):

• Income Tax: £11,000
• Savings Allowance: £1000
• Dividend Allowance: £5000 [now £2000]

In addition, both would have a Capital Gains Tax Allowance of £11,100, if they were able to take profits on any investment not in an ISA. (There are also other tax allowances or tax-free income that might be applicable.)

Now, most of us don't need to go to this level of dedication in developing a tax strategy - for most people investing in ISAs or SIPPs would be perfectly adequate. But in this instance, the DIY Income Investor does need a more 'aggressive' strategy - primarily due to a sizeable windfall.

So, to avoid any more Income Tax, the DIY Income Investor will be investing in dividend shares outside an ISA/SIPP for the next couple of years - until the additional capital can be transferred into one of those tax shelters. With an expected yield of around 5-6%, this could tax-shield nearly £200k for a couple.




I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.