Reduction in dividend allowance confirmed
Now that the second Finance Bill of 2017 has been published, we finally have confirmation that a number of measures announced earlier this year are to be included on the statute books. These measures were cut from the first Finance Bill of 2017 due to the snap election.
These measures includes confirmation that the reduction in the dividend allowance from £5,000 to £2,000 will come in to effect from April 2018. The £5,000 dividend allowance was introduced in April 2016 and replaced the old dividend tax credit.
The tax rate for dividends received in excess of the dividend tax allowance have not changed and will be taxed at the following rates based on the recipient’s highest rate of income tax:
- 7.5% for basic rate tax payers
- 32.5% for higher rate tax payers, and
- 38.1% for additional rate tax payers.
We would recommend that any shareholder directors that can benefit from the higher dividend allowance take advantage of the higher allowance before the end of the current tax year. Even with this reduction in the allowance, the high dividend, low salary strategy adopted to reduce NIC liabilities is still effective.