From 6 April, the tax-free dividend allowance will be cut from £5,000 to £2,000; a measure that was introduced in the 2017 Autumn Budget.
The measure will affect those who extract funds either partially or solely through dividends, from their owner-managed businesses, as well as investors with dividend generating shares and funds held outside of ISA’s and pensions.
In 2016, the way in which dividends were taxed underwent a significant change. The 10 per cent dividend tax credit was removed and instead the first £5,000 of dividends became tax exempt for individuals.
Meanwhile, the rate at which dividends were taxed was also reviewed. The new rates changed from 10 per cent, 32.5 per cent and 37.5 per cent, to 7.5 per cent, 32.5 per cent and 38.1 per cent for dividends exceeding the allowance in the basic, higher and additional rate taxpayer bands.
Despite the reduction to the allowance, the tax rates themselves will not change. As a result, not only will more tax be payable on dividend income but more people will likely be subject to the tax and will therefore be required to submit a tax return.
Tax rules are changeable and how they affect you depends on your individual circumstances which, likewise, aren’t always fixed. As with any tax, careful planning and a thorough review of your position can help to mitigate the impact of any changes.