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Point of View

Tax-free Dividend Allowance change:
redressing the balance, or desperate measures?

Many business owners and investors were surprised when the Chancellor announced a reduction in the Tax-free Dividend Allowance from its current level of £5,000 to £2,000. Especially since the allowance was only introduced in April 2016 when it replaced the Dividend Tax Credit.

This change, plus the proposed increase in National Insurance Contributions for the self-employed (which has subsequently been abolished), have been criticised as being a deliberate attempt to undermine small businesses – a confusing message from a Government that pledged its desire to make the UK a great place to start and grow a business.
 
Although he maintains this taxation change is simply to reduce the differences between the salaried and the self-employed, it’s clear the Chancellor desperately needs to raise revenue to help fund public services. He has been left with very little wriggle room, and has been forced to tinker around the edges to raise much needed funding.

How does the Tax-free Dividend Allowance affect you?
 

At the moment the allowance means you don’t pay tax on the first £5,000 of your dividend income, regardless of how much non-dividend income you have. This applies whether you are a director/shareholder of your own company, or a shareholder in another company.
 
From April 2018, you will only be able to take £2,000 of dividend income tax-free. The rest will be charged at:
 

  • 7.5% on dividend income within the basic rate band

  • 32.5% on dividend income within the higher rate band

  • 38.1% on dividend income within the additional rate band

 
This will affect people in two ways:
 

  • company directors with a shareholding in their business will only be able to take an extra £2,000 tax-free cash out of their firms each year

  • investors who hold £50,000-plus of investments outside their usual ISA allowance (currently £15,240 but set to rise to £20,000 from April 2017), and receive dividends from these investments, will need to ensure they are maximising the new ISA allowance

What now?

 

If you are a business owner, and have structured your remuneration to take advantage of the dividend allowance, you will need to revisit your income strategy. Although the change won’t come into force until April 2018, it pays to start thinking about it now.

For investors, please contact your financial adviser, as there are ways to mitigate this change by moving your investments into an ISA or SIPP.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.