Investing in UK dividend shares can be a great way to increase one’s income. And using a Stocks and Shares ISA to do so can provide significant tax benefits as well.
Stocks and Shares ISA tax benefits
Several years ago, the government re-organised the way dividends were taxed in the UK. Investors now receive a dividend allowance of just £2,000 a year. Anything above this level attracts a tax rate of 7.5%. This dividend tax rate hits 32.5% for higher rate taxpayers.
These tax changes have made it expensive to own UK dividend shares. That’s where the Stocks and Shares ISA comes into play. Any income or capital gains earned on the money invested inside one of these wrappers does not attract tax. One does not even have to declare the investment on a tax return.
This makes them exceptionally desirable products for income investors. And because there are no restrictions on withdrawals, opening one is a no-brainer for savers in my view.
UK dividend shares
I own a basket of UK dividend shares in my Stocks and Shares ISA. I think there are some terrific income bargains on the market right now, which look extremely attractive in the current interest rate environment.
Some of these companies offer dividend yields in high single digits, which is more than double the index average.
Take British American Tobacco. Shares in this organisation currently support a dividend yield of around 7.5%. The payout is covered 150% by earnings per share, and the business has reduced debt significantly in recent years. Based on these developments, the company’s dividend yield is exceptionally sustainable, in my opinion.
Another option is GlaxoSmithKline. Shares in this company currently support a dividend yield of around 4.5%. Once again, the dividend payout looks to me to be well covered by earnings per share, and Glaxo has a solid track record of earnings growth. I think this bodes well for future dividend growth over the long term.
Royal Dutch Shell and BP are two other UK dividend shares that I would consider buying for a Stocks and Shares ISA in 2021. While these companies have reduced payouts over the past 12 months, at current levels, the yields still look appealing, sitting at around 5%. After recent reductions, I think the distributions also appear more sustainable. A sustainable dividend is just as important as a high dividend, in my opinion.
An excellent way to buy a basket of UK dividend shares at the click of a button is to acquire an investment trust or dividend fund. There is a range of these investment vehicles on the market. Some of the investment trusts with the most extensive track records are City of London, which has increased its dividend for 50 consecutive years, and JPMorgan Claverhouse, which has increased its payout every year for 43 years.
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Rupert Hargreaves owns shares in British American Tobacco. The Motley Fool UK has recommended GlaxoSmithKline. 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.
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