13th February 2018

Dividends are the distributions which a company pays its shareholders from time to time out of its profits. From 6 April 2018, the tax allowance on dividends will be cut from £5,000 to £2,000, affecting over two million people in the United Kingdom.

In a major shake-up to the rules on the taxation of dividends, it was announced by George Osborne (remember him?) in his Summer Budget of 2015 that with effect from 6 April 2016 dividends would no longer attract tax credits, which hitherto had satisfied any income tax liability for those shareholders not subject to higher rates of tax.

Instead, since tax year 2016/17 dividends have been subject to the following new tax rates:

7.5% – Dividend income within the basic rate band

32.5% – Dividend income within the higher rate band

38.1% – Dividend income within the additional rate band

Despite the increased rates, many higher earning individuals have found themselves in a better position because of the new dividend allowance, which exempts dividends to a total of £5,000 for the year from any charge to income tax; a limit that was extended (rather grudgingly) by Chancellor Philip Hammond for the current tax year ending 5 April 2018.

However, with effect from 6 April 2018 (a year later than Hammond originally intended) the dividend allowance will be reduced from £5,000 to only £2,000.

What impact will the change have?

Any shareholder who has received dividend income in the region of £5,000 in either of the last two tax years and who anticipates the same level of dividend income in the tax year 2018/19 will experience an automatic tax increase as shown in the table below:

Saver with £5,000 of dividend income
Tax band Projected 2018/19 tax increase
Basic £225
Higher £975
Additional £1,143

 

For many investors there will be little that they can do about this, but shareholder/directors controlling their own companies have a little more flexibility and, in fact, despite the cut in the allowance, dividends remain a tax effective means of deriving income in comparison to alternative methods. At UNW we can help plan practical strategies which are personally, commercially and fiscally effective.

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