Investors have been dealt a massive blow in the Budget on news that dividend allowances will be more than halved to £2,000. This is the amount of money you can earn tax-free on investments held outside of an ISA or self-invested personal pension (SIPP) and over and above the £11,000 personal allowance level.
Many investors won't be affected by the changes if they only hold their investments in an ISA or SIPP as income inside these wrappers is tax-free.
The changes are relevant to investors who have investments outside of an ISA or SIPP. You can earn up to £5,000 income from these investments tax-free each year under current rules.
You also need to consider that everyone in the UK has a personal allowance enabling them to earn up to £11,000 tax free each year.
So you only start paying tax an income from investments once you've used up the £5,000 dividend allowance and the £11,000 personal allowance.
Chancellor Philip Hammond says the rules will change. The £5,000 dividend allowance drops to £2,000 from April 2018; and the personal allowance will rise to £11,500 from April 2017.
WHO IS HIT BY THE CHANGE?
Anyone earning 4% annual income on investments would therefore need their portfolio (held outside of an ISA or SIPP) to be worth £50,000 or more to breach the dividend allowance level and start paying tax.
It is a stark reminder to always use your ISA allowance each year to maximise tax benefits. The ISA allowance moves to £20,000 from 6 April 2017.
The Government says 80% of 'general investors' will pay no tax on dividends under its new proposals.
INFLATION WIPES OUT RETURN FROM NS&I BOND
The Government has confirmed the NS&I savings bond will pay 2.2% a year over a three-year term. This savings vehicle is open to anyone aged 16 and over with a minimum investment limit of £100 and maximum investment limit of £3,000.
Based on the updated inflation forecasts from the Office for Budget Responsibility (OBR) the 'market-leading' rate offered on the bond will be worth nearly nothing in real terms. The OBR forecasts inflation will hit 2.4% in 2017, falling to 2.3% in 2018 and 2% in 2019.
There were some more positive headlines from the OBR - it now expects the UK economy to grow 2% rather than 1.4% in 2017 although sees growth slowing to 1.6% in 2018, against a previous forecast of 1.7%.
More ominously forecasts for 2019 and 2020, years when we may be living in a post-Brexit world, have been downgraded from 2.1% to 1.7% and 2.1% to 1.9% respectively.
Public sector net borrowing is revised down sharply in the short-term thanks to 'one-off factors' and UK debt is expected to peak at 88.8% of economic output in 2018 - 1.4% lower than the OBR had forecast alongside the Autumn Statement.
