Reduction in dividend allowance from 6 April 2018

From 6 April 2018, the existing tax-free dividend allowance of £5,000 will be reduced to £2,000, it has been confirmed.

The measure, which is intended 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,” will be widely felt by all individuals with a dividend income above £2,000 – who will now be taxed on this income.

The Government has estimated that the change will affect some 2.27 million individuals in 2018 and 2019 – however, it is thought that some two thirds of all those who enjoy dividend income will not be affected.

Further information about the change can be accessed on the GOV.UK website here.

Once the changes have taken effect, the first £2,000 of dividend income will be exempted by an allowance and taxed at zero per cent. However, the remaining dividends will be taxed at the individual’s appropriate tax rate, unless these are covered by their personal allowance.

Previously, when it comes to dividends, many contractors have benefitted from remuneration strategies – such as accepting a low salary up to the National Insurance (NI) threshold or their personal allowance, and then accepting the remainder of their income in dividends.

This approach can prove to be tax-efficient, as dividends do not attract NI. However, with the dividend tax free allowance falling drastically from £5,000 to £2,000 next month, such simple tax-planning strategies may prove difficult. Due to this, contractors would be better placed to seek specialist advice in relation to tax planning going forward.

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