Tax-efficient investments: Dividend cut is in pipeline for PEPs

THE AMOUNT of dividend income you can receive from personal equity plans (PEPs) is going to be cut from 6 April because of tax changes introduced in the last budget.

This applies as much to investment and unit trusts as it does to shares in British companies that are held in a PEP. The change will also affect equity income from the government's new Individual Savings Account.

From 6 April the 20 per cent tax credit on dividends that PEP managers reclaim and reinvest or distribute will be reduced to 10 per cent of any dividend. This reduced rate will be finally phased out on 6 April 2004.

At present, for every pounds 100 of dividend income from a PEP, the same "un- pepped" investment would pay pounds 80 net to a basic-rate taxpayer and just pounds 60 to a high-rate taxpayer. After next April, the amount you receive from a PEP or ISA will fall to just pounds 88.80.

The dividend payable to basic- and high-rate taxpayers will remain the same. Corporate bonds deemed to pay interest not dividends have 20 per cent basic-rate income tax deducted at source, but if held in a PEP or ISA this can be reclaimed if at least 40 per cent is invested in corporate bonds.