People with lots of income-producing investments outside an ISA or pension will face a higher tax rate this year, if they earn more than £2,000 in dividends in a tax year. That is because the dividend tax is rising, with an extra 1.25% being added to all the tax rates, regardless of the level of dividend tax you pay.
That means any dividend income above this amount is taxed at 8.75% for a basic rate taxpayer, 33.75% for a higher rate taxpayer or 39.35% for additional rate taxpayers.
This means that it is more beneficial than ever to put your income-producing investments inside an ISA, to protect them from tax. You can use the bed and ISA process to move assets into an ISA, but if you have too many investments to move them all in one tax year you should prioritise the ones paying the highest amount of dividends.
Any dividends from investments in your ISA can be withdrawn tax-free, but if you don’t need the income now you could use them to turbo-charge your returns. If you reinvest them, you can buy more shares in the same investment, which can have a dramatic impact on the size of your ISA fund over the long term.
