Farewell dividend allowance 

Not quite goodbye to the dividend allowance but is it the beginning of the end?

Introduced not even a year ago in April 2016, the £5,000 dividend allowance has had a short life and will be reduced to £2,000 from 6 April 2018. In his speech the Chancellor announced the reduction as part of a package of measures to reduce the tax differential between the employed and the self-employed on one hand, and those working through a company on the other.

At present, a director/shareholder of their own company can remunerate themselves through a combination of salary and dividend, which can be varied each year depending on corporate profits and tax rates as well as individual tax rates. A director/shareholder earning a £20,000 salary and taking a £5,000 dividend would pay £1,000 less tax and no NI on his £5,000 dividend, compared to an employee earning £25,000 salary or a self-employed individual making a £25,000 profit. Savings can be even greater for higher and additional rate taxpayers.

The reduced dividend allowance does not only apply to directors/shareholders, but will affect everyone who receives dividends. So, many investors with share portfolios will pay more tax as a result of the reduction in the allowance. Part of the 'making tax digital' strategy was to simplify the tax affairs of many taxpayers whose only income may be a salary or pension taxed under PAYE, modest bank interest and dividends, so this partial U-turn seems to go against the previous simplification trend.

However, perhaps the government's real intention is made clearer in the detailed notes to the Budget. This states that the measure will ensure that support for investors is more 'effectively targeted' and that the total amount of income they receive tax free is 'fairer and more affordable', in light of increases to the tax-free personal allowance and the ISA allowance. It seems that the government now believes that it was too generous giving a £5,000 dividend allowance to all taxpayers and that the need to raise tax revenues is more important than simplifying the tax affairs of many individuals with modest levels of dividend income.

The £5,000 dividend allowance is of course still available for the remainder of this tax year (2016/17) and next year (2017/18), so make use of the full £5,000 dividend allowance this year and next where you can.

For further information please contact Karen Clark or your usual RSM advisor.