Budget 2017: Business owners hit by tax-free dividend allowance cut
The fall in the tax-free dividend tax allowance from £5000 to £2000 a year from April 2018 will hit the many businesses owners who pay themselves in dividends on top of a small salary.
The tax-free dividend allowance of £5,000 was introduced by the previous chancellor, George Osborne, in 2015.
The chancellor, Philip Hammond, stated that the cut to £2,000 was meant to "address the unfairness" around the dividend allowance, which he said is "an extremely generous tax break for investors with substantial share portfolios".
He continued to say that around half the people that will be affected were directors and shareholders of private companies. Many small traders set up businesses by forming a company and paying themselves through dividends as well as a small salary. The upshot will be higher tax bills for these people.
Whilst the chancellor said the intention was to reduce incentives for workers to incorporate themselves as companies for tax reasons, the Treasury said that savers make up the other half of the 2.2 million people affected by this change and that they will each lose an average of around £320 a year. This is due to the impact on savers who have investments of more than £50,000 in stocks and shares that are outside Isas.
Investors should therefore be looking to make the most of their generous tax-free Isa allowance before the implementation date, to maximise their tax-free income.
Investors have the opportunity to shelter £15,240 in this current tax year to 5 April 2017, so need to move quickly for this tax year if they have not already used their full allowance. They then have the opportunity to shelter a further £20,000 in the 2017/18 tax year, as the Isa allowance is increasing from 6 April. Potentially they could also shelter £20,000 on the first day of the 2018/19 tax year (6th April 2018).
For help or advice on the tax-free dividend allowance cut, contact Kellands Corporate.