In the Summer Budget 2015, the government announced that dividend taxation would be reformed from April 2016 by replacing the Dividend Tax Credit with a £5,000 dividend allowance, and increasing the rates of tax payable on dividends in excess of the new allowance 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.
Previously, a basic rate taxpayer paid no tax on their dividend income; only higher rate or additional rate taxpayers paid tax on their dividend income.
INDIVIDUALS AND BUSINESSES AFFECTED
In the Spring Budget 2017, it was announced that the £5,000 dividend allowance would be reduced from £5,000 to just £2,000 for dividends paid on or after 6 April 2018. The Chancellor, Philip Hammond, said that the reduction was designed 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 that about half the people affected by the reduction in the allowance were directors and shareholders in private companies.
The cut in dividend allowance is likely to have a significant effect if you are a company director and take dividends as part of your remuneration package. Self-employed people often provide their services through companies, paying themselves a small salary which they top up with dividends to reduce their tax bill.
This change will directly affect those individuals with investments that are held outside tax-efficient wrappers such as ISAs and produce more than £2,000 of annual dividends. One of the ways to mitigate this tax hike is to make full use of tax-efficient wrappers, putting your investments into an ISA or a Self-invested Personal Pension (SIPP) if these products suit your investment needs and objectives.
The above is purely for information purposes only and does not constitute advice.