How will the new dividend allowance work?
Starting April 2018, there will be a new way in which dividend allowance will work. Shareholders currently are allowed to withdraw up to £5000 of dividends without it being taxed. Come April 2018 this will be cut from £5000 to £2000.
This news has left a lot of shareholders and business owners with a lot of questions which this article will endeavour to answer.
What is dividend allowance?
Before we get into the nitty gritty, what actually is dividend allowance? The allowance was only introduced in April 2016, so it is still fairly new. It was introduced to shake-up the way dividends are taxed.
Before April 2016, the tax credit system allowed shareholders to be paid dividends net which were multiplied by 10/9 to produce the gross dividend upon which the dividend tax was levied.
The allowance caused a lot of headaches for business owners, as dividends were subject to new tax rates depending on your tax band:
- Basic rate taxpayer – 7.5%
- Higher rate taxpayer – 32.5%
- Additional rate taxpayer 38.1%.
This basically means that now under the current rules the first £5,000 of dividends are tax free but then anything above that is taxed.
Who does the increased tax affect?
The increased tax will depend on your rate of income tax that you pay. If you fall in basic rate income tax band, you will have to find an extra £225 of tax (7.5% basic rate dividend tax x £3,000). Higher Rate taxpayers will face an increased bill of £975 and additional rate taxpayers £1,143.
Why has the dividend allowance been reduced?
You may be thinking that this decision is totally unfair, why is the chancellor targeting dividends? During his speech he said, “People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment”.
He believes that everyone should pay the same amount of tax, no matter whether they are an employee, self-employed or shareholders.
It wasn’t just dividends that he targeted. During his speech he also announced that there would be a dramatic increase in the level of Class 4 National Insurance that the self-employed have to pay. However, shortly after this announcement there was a u-turn on this. It seems that the chancellor forgot to include the benefits that employees receive that the self-employed do not when comparing employee taxation to non-employee taxation.
Has the General Election affected the cut going ahead?
You may be thinking that the planed dividend allowance cut was dropped because of the General Election, however, it was re-introduced into the finance bill meaning that it will still go ahead.
If you would like more information on the topic please visit Gov.uk
This blog is not intended to provide a personal recommendation and is not a substitute for professional advice.