Tax-free dividend allowance to reduce

Wed 08 Mar 2017

The Chancellor announced in his Spring Budget that the tax-free dividend allowance will reduce to £2,000 from April 2018.

The current allowance means that there is no income tax to pay on the first £5,000 of your dividend income.   Dividends above this level are taxed at 7.5% (basic rate tax payer), 32.5% (higher rate tax payer), and 38.1% (additional rate tax payer).

For a basic rate taxpayer using their dividend allowance, the change will cost them an extra £225 in tax in 2018/19.   This will increase to £975 for those paying at the higher rate and £1,143 for an additional rate taxpayer.

As the allowance is available to anyone who has dividend income, there are steps that can be taken to ensure that any investments held are structured in the most tax-efficient way; for example through maximising ISA allowances and ensuring that investment portfolios are shared appropriately between spouses.

Only time will tell whether we will see a significant increase in the number of self-assessment tax returns needing to be filed as a consequence of this change, or whether HMRC will be able to collect any additional tax through restrictions to PAYE codes.

To discuss your position and your own circumstances in more detail, please contact Ian Pickford (ian.pickford@mazars.co.uk) in the Mazars Private Client team, for further advice.