This is to be done through the introduction of a new tax called the Health and Social Care levy, which affects the employed, self-employed and employers who pay class 1 and class 4 national insurance contributions. Additionally, it was announced the tax rates applied to dividend income would also increase by 1.25 percentage points and this would apply from April 6 2022.
What this means for clients who have dividend income either paid to them or accumulated in the fund is that from April 6 2022 the new rates applicable will move from 7.5 per cent to 8.75 per cent for a basic rate taxpayer, 32.5 per cent to 33.75 per cent for a higher rate taxpayer and from 38.1 per cent to 39.35 per cent for additional rate taxpayers and discretionary trustees after the standard rate band has been exhausted.
This means clients will be paying more tax on their dividend income.
What are the alternatives?
Depending on the capital gains of the assets in question, the ability to equalise those assets between spouses and registered civil partners, the tax rates applicable, any previous losses and any exemptions to be utilised, consideration might be given to holding these assets within an onshore or offshore bond structure.
For clients looking to invest in equities and bonds to mitigate the costs surrounding funds and collectives or for a more targeted portfolio utilising a discretionary fund manager, a segregated portfolio service via an offshore bond could meet these clients' need.
Each client’s personal investment, taxation and risk circumstances should be considered when assessing suitability for using an investment bond wrapper, but utilising one could negate some taxation and ongoing administrative burdens.
With the end of the tax year approaching, we have the opportunity to speak to our clients and ensure we are making use of all the personal tax allowances we have available so that the investments our clients are holding are in the most tax-efficient way for them to achieve their investment goals.
Julia Peake is a technical specialist in tax and estate planning at Canada Life
