Tax free dividend allowance to be reduced to £2,000

Tax free dividend allowance to be reduced to £2,000

The Chancellor, Philip Hammond, announced measures to limit the rise in tax-driven incorporation in the March 2017 budget. The £5,000 tax free dividend allowance introduced by George Osborne will be reduced to just £2,000 from 6 April 2018. Mr Hammond claimed that many smaller owner-managed businesses have incorporated as limited companies mainly for tax reasons. Typically the director/shareholders of such businesses have paid themselves in dividends and paid less tax than similar unincorporated businesses.

Currently, once the dividend allowance has been used the remaining dividends are taxed at 7.5%, 32.5% and then 38.1% depending upon whether the dividends fall into the basic rate band, higher rate band or the additional rate. There are rumours that these dividend rates may also be increased in future years.

Although the cut in the tax-free dividend allowance is clearly aimed at owner managed companies, it will also impact on those with substantial share portfolios. Mr Hammond reminded us in his speech that the annual ISA investment limit increases to £20,000 from 6 April 2017 and that dividends on shares held within an ISA continue to be tax free.

Update – 26 April 2017 – Please note that in view of the impending election in June this measure has now been dropped from the Finance Bill 2017.  It may of course resurface in the next parliament depending on which party wins.

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