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Tax Insider Tip: Dividends And Non-Taxpayers

6th Jun 2014
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Dividends are received with a non-refundable 10% tax credit.

Because this cannot be reclaimed by non-taxpayers, it is worthwhile considering changing investments so as to receive savings income, such as bank or building society interest, rather than dividends.
This is because bank and building society interest suffers a 20% tax deduction, which unlike the tax credit on dividends can be claimed back by a non-taxpayer.

Non-taxpayers can also register to receive bank and building society interest gross (see Tip 10). The ability to receive the full amount of savings income can be very important for pensioners on low incomes relying on their investments to generate income in retirement.

Example:
Mr and Mrs Smith have built up a portfolio of investments, which currently yield £9,900 (gross) per annum in dividends. The dividends are all received with a 10% tax credit, which leaves a net income of £8,910 (£9,900 - £990). They have no other income.

By switching their investment strategy (say by investing in Government Stock), and assuming they receive the same gross income of £9,900 with a 20% tax deduction, Mr and Mrs Smith will receive a net income of £7,920 (£9,900 less 20% deduction (£1,980)).

By filing tax repayment claims and utilising their personal allowances, they claim back the £1,980 tax deducted and are left with a net income of £9,900.
This means that they are better off by £990 (or 10%).

This can be a very significant amount of money, especially for those on low incomes.

A word of caution. When making investment decisions you should consider the return on investment and any costs, as well as the tax savings, and ensure that the net result from making the switch is beneficial.

 

This is a sample tip taken from our 136 page guide:
101 Ultimate Tax Strategies Revealed.

Click here to receive a free copy of this tax saving guide today!

 
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