There weren’t many surprises in Wednesday’s Budget, but one nasty one was the cut in the dividend tax free allowance from £5,000 a year to £2,000 a year.
Sure, this is meant to hit small business owners who are being crafty with their tax dodges, but it will also have an impact on investors in Yorkshire PLCs, many of whom rely on this money for their income or pension.
Blackfriar regularly hears from readers who are keen to back Yorkshire PLCs by investing in them.
The region has a long and proud history of hardworking firms that like to reward their loyal investors with decent dividends.
This change to the dividend is a major blow to them.
Paul McManus, managing director of Walbrook PR which handles a number of small Yorkshire PLCs, said: “Whilst this cut is meant to help police the abuse of individuals using dividends in place of pay-rolled salary, the unintended consequence is that it would equally punish responsible investors who have saved up for their retirement, by imposing higher taxes on relatively modest dividend incomes.
“This isn’t good for Yorkshire investors looking to put their hard earned money to work and nor is it good for Yorkshire PLCs who continue reward shareholders for their support through dividends.”
At a time when responsible Yorkshire companies are keen to involve retail investors in their fundraising, be it through IPOs or cash raising, this is another attack on the small investor.
Jason Hollands, managing director at wealth management group Tilney, described the move as “another raid on the middle classes”.
“Many of these shareholders are people who worked for a company that listed, like The Halifax,” he said.
“They are the ones who will be caught in the crossfire.”
He advises small shareholders to put their shares into an ISA or switch the ownership to a partner who has a lower tax exposure.
“It is a powerful reminder of the importance of fully utilising Individual Savings Account allowances which are currently £15,240 per year and set to rise to £20,000 from April 6 this year, as well as pensions,” he said.
Laith Khalaf, senior analyst at Hargreaves Lansdown, agreed and pointed out that the Government has no qualms about changing its mind when it suits it.
“The Chancellor has taken an axe to the dividend allowance, which amply demonstrates why investors should make the most of their ISA and pension allowances, to protect as much of their wealth as possible from the taxman.
“Even when the Government appears to relax its tax rules, its policies can turn on a sixpence, and end up costing you an awful lot of money if you’ve been complacent about using your tax shelters in the meantime.“
Eric Burns, deputy head of institutional research at WH Ireland in Leeds also pointed out that this was a change in direction from the Government.
“This was a bit of a shock, not least that it rows back on the £5,000 allowance set only last year,” he said.
“It does reinforce the attractions of an ISA where dividends continue to be received tax free and the allowance increases to a very generous £20,000 from April.“
Dan Sheahan, managing director at Investec for the North of England, highlighted the impact the move will have on SME’s
“It’s clearly not helpful to smaller business owners who now have to pay more tax on their dividend income meaning they have to extract more from their businesses to obtain the same net income to live off,” he said.
Given the Government’s propensity to change its mind and the turnover in Chancellors, it makes sense for Yorkshire investors to protect their hard earned money through the use of ISAs. That way they can still invest in the region’s up and coming firms.