Spring Budget 2017 – Dividend allowance
The new dividend tax allowance was introduced in April 2016. The new allowance replaced the dividend tax credit with an annual £5,000 dividend allowance with tax payable on dividends received in excess of this amount.
In his Budget speech, the Chancellor announced changes to this year old allowance. Mr Hammond told the House of Commons that this allowance was an overly generous perk and has increased the tax advantage of incorporation and given a big tax break for investors with substantial share portfolios. The result is a significant cut in the tax free allowance to £2,000 from April 2018.
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.
It should be noted, that the dividend tax allowance does not reduce income for tax purposes. Where income from dividends is £5,000 (£2,000 from April 2018) or less this amount will still be added to taxable income. The relief is actually applied further down a taxpayer’s computation for the year. The first £5,000 of dividend income is effectively taxed at 0%. This increases a taxpayer’s total taxable income and could push taxpayers into the higher rate or additional rate band.