Yesterday’s budget announcement of pending dividend tax changes will be seen by many as a coup for savers and retirees alike - the much needed encouragement for Britons to buy into a savings regime while also providing some form of relief for yield-starved income seekers.

Under the new system, investors will not pay tax on the first £5,000 in dividend income. After that, basic rate tax payers will pay 7.5 per cent, higher rate taxpayers will pay 32.5 per cent and additional rate taxpayers 38.1 per cent.

“The Chancellor’s introduction of a tiered-dividend tax rate plus a tax-free sum is great news for the increasing number of people looking to dividend income to help fund retirement - especially in light of the pension freedoms,” says Tahmina Mannan, market and industry content editor at ratings and research firm FE Trustnet.

“It has been increasingly difficult for people to look to traditional income sources to fund later years with interest rates as low as they have been for years.

“The changes will help a large majority of investors and will ensure that ordinary savers with modest portfolios, or even first time savers looking to grow their money will be further encouraged – which may have the added benefit of increasing investment in the UK economy.

“Hopefully, this will not just encourage Britons to save but also encourage savers to look to using their yearly stocks and shares ISA allowance – knowing that they have an alternative option in order to draw on income should they need to away from savings in ISAs.”

For investors looking to take advantage of these changes, here are two well-rated income fund picks with a UK bias.

Majedie UK Income

This five FE crown rated fund, led by FE Alpha manager Chris Reid and co-managed by Yuri Khodjamirian and Mike Totton, has an excellent track record and ranks in the top five in the  UK equity Income sector over the past one and three years, nearly 12 per cent and more than 83 per cent, respectively. Its sector has returned nearly six per cent and 44 per cent over the same periods.

Reid focuses on creating a high conviction portfolio by picking companies that are often unloved in the market, but undergoing positive transformation – while still paying out a decent dividend. This gives the fund the added benefit of capital growth coupled with income.

This fund should be held for at least five years. Investors should note that due to the fund’s good track record and investors’ need for income has seen a strong uptick in inflows – which could see the fund’s capacity reached within the next year and as half.

Rathbone income

Another highly rated fund with five FE Crown ratings, this fund will suit those looking for a more cautious approach with their money.

Manager Carl Stick has been leading this £1.08bn fund since 2000, and suffice to say has seen his fair share of the difficulties that have plagued the economy and the markets. This has, however, helped refine the fund’s approach to UK companies. When looking at investments, the manger’s first goal is to manage risk, or reduce the potential for capital loss. 

The portfolio is concentrated around 40 holdings with low business and financial risk. Stick invests in the company for the long-term, meaning portfolio activity is low and prefers stocks that seem out of favour – which often means the fund will not be the best performer during a fast-rising market.

The fund has a risk score of around 77, with cash holding zero and the FTSE at 100. Morningstar

Source: FE Trustnet, 1Y performance to 08/07/2015