One of the very few surprises of Phillip Hammonds’ March Budget was his cutting of the dividend allowance which comes in 2018/19.
This dividend allowance was first installed in the post-election Budget of July 2015.
The Allowance was designed primarily to discourage self-employed business owners from using Company Incorporation as a way of avoiding national insurance contributions (NICs). The irony being that one of the first effects it had was to dramatically increase the government tax take on dividends! Indeed, HMRC has provisionally estimated that £10.7BN of dividend income was brought forward into 2015/16 to avoid the higher rates of tax that were to apply to dividends from 2016/17 onwards. The Chancellor’s announcement of a cut in the dividend allowance from the current £5,000 to £2,000 from 2018/19 will not likely result in such a pre-emptive surge in dividend payments, but it will certainly add to the Exchequer’s income.
Whilst Hammond justified the move on the same ‘incorporation-deterring’ grounds as his predecessor George Osbourne, the collateral damage to ordinary investors is more significant than that following Osborne’s original legislation.
This table shows the ‘crossover dividend’ levels at which investors will pay more tax in 2018/19 than they did under the old rules in 2015/16.
|Taxpayer (Dividend Tax Rate)||More tax paid than in 2015/16 if dividends exceed||Maximum tax increase between 2016/17 and 2018/19|
Please Note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.