On 8 March, the Chancellor of the Exchequer, Philip Hammond, delivered what people had expected – a Budget of few surprises to provide a ‘strong, stable platform for Brexit’. However, he did reveal the tax-free dividend allowance will be reduced from £5,000 to £2,000 from April 2018.
The Treasury Budget document stated that this was intended to ‘reduce the tax differential between the self-employed and employed, and those working through a company, to raise revenue to invest in public services, and to ensure that support for investors is more effectively targeted.‘
Many people have opted to work through a personal company, taking remuneration as a mix of dividends and salary, and this change will reduce the attractiveness of taking dividends from a company. According to the Budget statement, about half of those affected will be those using personal companies in this way.
Under existing rules, which were announced in the Summer Budget 2015, the Government reformed dividend taxation from April 2016 by replacing the dividend tax credit with a £5,000 dividend allowance, and increasing the rates of tax paid by 7.5 percentage points in each band to 7.5% for basic rate, 32.5% for higher rate and 38.1% for additional rate.
This reduction is forecast to raise the Treasury £930m in 2021/22. The Treasury Budget document stated: ‘The policy objective of this new measure is to ensure that support for investors is more effectively targeted and that the total amount of income they can receive tax-free is fairer and more affordable, in light of increases to the tax-efficient personal allowance and the Individual Savings Accounts (ISA) allowance.’
Individuals and households who receive dividend income in excess of £2,000 will be affected. Around two thirds of all those with dividend income will be unaffected by this measure. It is estimated that this will have an impact on around 2.27 million individuals in 2018 to 2019, with an average loss of around £315.
Mr Hammond said that the cut to £2,000 was meant to ‘address the unfairness’ around the dividend allowance, which he described as ‘an extremely generous tax break for investors with substantial share portfolios’. He said about half the people affected by this measure were directors and shareholders of private companies.