From April 2018 the tax free dividend will be reduced from £5,000 to £2,000, the chancellor Phillip Hammond announced in his Spring Budget.
The current Dividend Allowance allows directors and shareholders to take £5,000 of dividends out of their company tax free, over and above the personal allowance. It is also, argued the chancellor “an extremely generous tax break for investors with substantial share portfolios”.
Those affected by this new measure will include directors or shareholders of private companies, and investors in shares with holdings worth typically £50,000 outside ISAs.
The announcement was met with mixed reviews from the Association of Chartered Certified Accountants (ACCA). Chas Roy-Chowdhury, head of tax at ACCA, commented: “The chancellor’s reduction in the dividend allowance is a major policy U-turn in less than two years.
“I would be concerned if this meant that the government is considering removing the allowance altogether when it was originally proposed as an offset for increases in dividend taxation. If it is removed altogether, the taxation on dividends should be reduced.”
In 2015, former chancellor George Obsorne announced changes to the tax free dividend framework. At that time, he said HMRC will tax dividends at all levels at a rate of 7.5 per cent more than was currently the case (after first deducting a new £5,000 tax-free dividend allowance).
The changes now and then are designed to target small company owners who pay a small salary and then a large dividend.
Toby Ryland, corporate tax partner at HW Fisher & Company, said: “A huge frustration for small business owners is the lack of consistency from the government.
“Not so long ago, the government was encouraging people to incorporate via the tax free dividend allowance and now, by reducing it, it is giving out the exact opposite message.”
Meanwhile, Paul Haywood-Schiefer, assistant manager at Blick Rothenberg revealed: “The dividend allowance cut from £5,000 to £2,000 will cost basic rate taxpayers £225, higher rate taxpayers £975 and additional rate tax payer £1143.”
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