Skipping this after the Autumn Budget could cost you dearly…
The Stocks and Shares ISA is the best financial product in the world for growing long-term wealth. And after Wednesday’s Autumn Budget, they’ve become even more essential, in my view.
With an ISA, individuals don’t pay a penny in capital gains or dividend taxes to HMRC. What’s more, unlike other tax-efficient products like Self-Invested Personal Pensions (SIPPs), Brits don’t face income tax when making withdrawals.
In an era of alarming tax rises, protecting oneself with an ISA is becoming essential in my view. The latest Autumn Budget has made the huge cost of not using one potentially even greater.
But why?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Dividend tax rises
There was lots of talk about changes to Cash ISA allowances in the run-up to today. Many peoples’ predictions came true, with the annual allowance cut to £12,000 from £20,000 from April 2027.
What commentators weren’t expecting, though, was a hike in dividend taxes from the next financial year. As a consequence, both cash savers and stock investors have come out of the Budget as potential major losers.
From April 2026, dividend investors could end up paying 2% more on their cash payouts from April 2026. Dividend tax for basic rate taxpayers will rise to 10.75% from 8.75%. Higher-rate taxpayers, meanwhile, will see the levy rise to 35.75% from 33.75%.
Increasing costs
Successive governments have been increasingly eager in recent years to milk dividend investors to solve budgetary crises.
In 2018, the annual dividend allowance (the tax-free limit for dividend payments) was slashed to £2,000 from £5,000 previously. This was halved to £1,000 in 2023, before being halved again to £500 in 2024.
The dividend tax was also raised by 1.25% for basic-, higher-, and additional-rate taxpayers.
Following today’s Budget, a higher-rate taxpayer receiving £10,000 in dividends each year will pay £3,396 from April 2026. That’s up from £3,206 today, which is still an uncomfortable amount.
Using an ISA
In this environment, it’s critical to use tax-saving products like Stocks and Shares ISAs as much as possible.
I myself use one of these products for passive income. One of my core holdings is Primary Health Properties (LSE:PHP), which is set up to deliver a large and sustained dividend.
As a real estate investment trust (REIT), the company is required to pay 90% of annual rental profits out in the form of dividends. From time to time, dividends could disappoint if the trust’s tenants can’t pay the rent. But over the long term, holding this dividend share outside an ISA could prove increasingly costly.
Primary Health has raised the annual dividend every year since the mid-1990s. This reflects its focus on the rock-solid medical asset market, along with its wide portfolio of tenants. I’m confident they’ll continue rising strongly, too, as the UK’s booming population drives demand for healthcare services.
With a £20,000 annual allowance, the Stocks and Shares ISA is a no-brainer for most Britons to consider in my opinion. They could save dividend investors a fortune in tax over time, particularly after today’s Autumn Budget.
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Royston Wild has positions in Primary Health Properties Plc. The Motley Fool UK has recommended Primary Health Properties Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
