In the 2017 Spring Budget, it was announced that there would be further changes to the dividend tax-free rules. This came just a year after the new dividend allowance came into effect in 2016.
Now from April this year (2018), the dividend allowance will be reduced from £5k to £2k tax free.
What exactly will this change mean, and how will you and your business be affected?
What is it?
The actual tax-free dividend allowance was initially introduced in 2016, replacing the former dividend tax credit. This was done to create a much simpler system that would see only those with a significant dividend income pay higher tax.
As per the initial creation of the dividend allowance, the first £5,000 of dividend income was no longer subject to tax but still sat within the relevant tax band for overall taxation purposes.
So, since April 2016 you could earn up to £16k in dividends (£5,000 dividend allowance + £11,000 personal allowance) without having to pay tax, as long as you had no other income.
Changes that could cost you
As stated, this will all change on April 5th this year, as the dividend allowance will be cut down to £2,000.
How much this affects you financially, will very much depend on the tax band your £5k dividends falls into – and you could see a cost of:
- £225 if it falls into the basic rate tax band.
- £975 if it falls into the higher rate tax band.
- £1,143 if it falls into the additional rate tax band.
The total tax cost may vary for you if your first £5k dividends ends up falling between two different bands.
So, from April you will only be able to earn up to £13,850 in dividends (£2,000 dividend allowance + £11,850 personal allowance) without having to pay tax – providing the Chancellor doesn’t introduce further changes before the implementation date.
Who will be most affected?
Any shareholders, or business owners of private companies who pay themselves in the form of dividends will be the most affected by this allowance cut.
Investors are also likely to be impacted, in particular those with portfolios producing over £2k income annually, outside of pensions or ISAs. Many investors wouldn’t even require a very large portfolio to exceed the £2k dividend.
It’s been predicted that around 2.27m people will be affected by the cut in 2018-19, each losing around £315 on average according to the Government.
If you’re concerned about the affects the dividend allowance tax cut could have on your business, then speak to us at RJF.
Make sure you contact RJF today, and get help making the best decision for your business.