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Use these five tricks to save £975 from HMRC's latest dividend raid

Sam Meadows
Income stocks, like retailer M&S, for which model Rosie Huntington-Whiteley is an ambassador, could be a good choice after changes to dividend taxes - Telegraph Media Group and © Geoff Pugh Photgraphy Ltd all rights reserved

Investors and the self-employed are bracing themselves for a reduction in dividend income that can be received tax free.

The limit will be cut from £5,000 to £2,000 next month. Currently only those with about £140,000 invested outside an Isa are affected by dividend taxes, assuming a reasonable investment return.

But calculations by Hargreaves Lansdown, the fund shop, suggest the new regime will hit anyone with £55,000 invested. However, with clever planning, it could be possible to shield as much as £160,000 from the taxman. 

If you earn dividends exceeding the allowance, the tax due is based on your marginal rate of income tax, with basic-rate payers charged 7.5pc, higher-rate payers 32.5pc and additional rate payers 38.1pc.

Someone who earns £5,000 in dividends will have to pay £225 tax if they are a basic-rate taxpayer, or £975 if they are a higher-rate payer from April. Sarah Coles from Hargreaves Lansdown said: “This will leave many investors with a bitter taste in their mouth.”

These five tactics offer savers a way to limit the tax they pay.

Save in an Isa

Money saved into an Isa is shielded from tax, so none will be due on any dividends. Prioritise dividend-paying stocks, such as high-street retailer Marks & Spencer or oil giant BP, or income funds that you own. 

The catch is you can only save £20,000 a year across all your Isas, so if you have a large portfolio (and will therefore be subject to dividend taxes) this will only partially help.

The process is known as “bed and Isa” and will involve selling your assets to crystallise any gains and then buying the same assets within an Isa. There could be capital gains tax (CGT) liabilities using this method.

Many banks and building societies offer a stocks and shares Isa, although investment choice is likely to be limited. Fund shops such as AJ Bell and Hargreaves Lansdown have an enormous choice of investments. 

'I'll pay tax on dividends for the first time ever'

Use next year’s Isa allowance

You can also use this trick to double your allowance. While you can only save £20,000 this tax year, on April 6 you will get a new Isa allowance that you can use on day one. If you transfer an additional £20,000 into your Isa on or after this date, before dividends have been paid, you can shelter £40,000 from dividend taxes.

Make use of your spouse

Married couples can transfer assets between them free of any capital gains tax. This means you can use your spouse’s Isa allowance by transferring £20,000 of investments to them. This, combined with the two methods above, can shield a total of £80,000 from the taxman.

Don’t forget about your pension

Most savers can put away £40,000 a year into a pension, and these investments will also avoid any dividend taxes.

If neither you nor your spouse has made any contributions to a pension in this tax year you could move £80,000 of your portfolio into a self-invested personal pension.

You will have to sell and repurchase your investments, so could breach your annual CGT allowance (£11,700 from April). You will not be able to access the money until age 55 and will pay tax at your marginal rate on 75pc of your overall pot.

Restructure your portfolio

You can change strategy, by buying shares or funds that prioritise growth. Another option is to buy “investment bonds”, which are invested in the stock market and are usually “whole of life” insurance policies. Be warned – many have exit penalties and you need to invest a sizeable lump sum.