Tax on ISA dividends

[alexian]

The dividend on shares held in Peps/Isa's used to be free of tax. I understand there is a tax element now. Can anyone tell what % it is and if there is any plan to change it.

[Annie Shaw]

10%. It's corporation tax charged to the company. Because it has already been paid by the company, you don't have to pay any more tax either in or outside an ISA if you're a basic rate taxpayer - but you can't reclaim it either because it's not tax on you - it's a tax on the company and it's treated as a "tax credit" when you receive it.

However for shares held outside an ISA higher rate taxpayers (but not basic rate taxpayers) have to pay another 32.5% on dividend income that falls above the basic rate Income Tax limit. Of course, there's no more tax to pay if the shares are inside an ISA.

There are no plans to change this because the arrangement was only introduced a few years ago (non-taxpayers used to be able to reclaim tax on dividends, but not any more).

[alexian]

Thanks for your reply. Very helpful. Does this mean that if a share price is 100p and the company states that the annual dividend is, say, 10p, the effective yield is 9% if it is held in an ISA?. Also when the share price as quoted in the FT is yieldin a dividend of x%, is that before or after the 10% tax is taken into account?

Alex

[Annie Shaw]

Richard Hunter, head of sharedealing at Hargreaves Lansdown, replies:

Yields are normally quoted net of dividend tax (whether in or out of an ISA), so a 10p dividend on a 100p share is a net yield of 10% - as quoted in the FT and so on. Strictly speaking, the gross dividend yield is 11.11% but no one quotes that for reasons of ease! (£1.11 less 10% = £1.00).

[alexian]

Thanks for this clarification. So just to be clear; if i see in the FT that a stock has a yield of 5%, then a my £10,000 shares Isa (in October - Im over 50!) will earn £500 per year compound, as long as the company maintains the dividend at the same level.

As a top rate tax payer, what I am trying to assess is the value a shares Isa's (on a roi basis) as an investment opportunity versus other alternatives ie bank / building society savings on a non Isa basis.

On the face of it many bue chip companies are yeilding 5% return tax free - providing,of course, they maintain previous year dividend and this way above what my £10,000 is earning in the bank savings account, which is about 2.8% (1.6% after tax @ 40%).

[Annie Shaw]

Indeed.

However, remember that shares are more risky than cash - both in terms of maintaining capital if the price falls and deriving income if the dividend falls.

L&G, Lloyds and Ladbrokes are just three to have cut their dividend recently.

[roo9186]

The dividends received on shares within the ISA, can they be kept in the ISA to be reinvested?

Thanks )

[Oggy]

Yes They can. I do this.