Reduction in the £5,000 dividend allowance – is this lady for turning…..?
Dividend Allowance and the Spring Budget 2017
Well the National Insurance increase for the self-employed introduced in the Spring Budget didn’t last very long it seems. At the first sign of political pressure it was quietly abandoned.
(Or was that postponed….?)
Unless there are further political objections and U-turns, one of the few remaining revenue raising changes in the recent spring budget was the reduction in the £5,000 dividend allowance from April 2018.
From this date the allowance will drop to £2,000.
This measure will increase the tax charge both for investors with significant, quoted share portfolios and also for many director/shareholders of private companies. Reducing tax and National Insurance bills by taking a lower proportion of remuneration as salary and topping this up with dividends has been a profitable ploy for a good while now and that tax free allowance was the icing on the cake.
A person receiving dividends of £5,000 may see the following amounts added to their tax bill for 2018-19, dependant on where the dividends sit within their basic, higher and additional rate income tax bands:
- Basic rate tax payers – a tax increase of £225.
- Higher rate tax payers – a tax increase of £975, or
- Additional rate tax payers – a tax increase of £1,143.
The current average dividend yield for FTSE 100 companies is close to 3%.
Based on this estimate, holders of portfolios worth in excess of approximately £67,000 may see an increase in their tax bill next year. There has been speculation in the press suggesting that affected investors (in quoted companies) may be able to use ISAs to shelter some of their dividend income from an income tax charge. But this won’t be an option open to owner/manager directors or shareholders owning unquoted shares in their own limited companies.
Director/shareholders who have adopted the low salary high dividend approach will suffer a tax increase but despite the reduction in the Dividend tax free allowance it is likely that the benefits of this strategy will continue to outweigh the tax and NIC cost of being self-employed.
Contact THP today
For more advice on the Spring Budget and how these tax changes will affect your business contact THP today.