Dividend allowance: will you need to pay more tax?

7th August 2017

A number of tax changes were scheduled for legislation in Finance Bill 2017 before being dropped due to the government calling a snap general election on 8 June 2017.

One of those measures was the reduction of the dividend allowance, cutting the amount of dividend income individuals can take out as profit from £5,000 to £2,000 from April 2018.

Chancellor Philip Hammond announced the measure in Spring Budget 2017 with the aim of levelling the playing field between the self-employed and investors when it comes to paying tax on profits.

What the government seemingly didn’t bank on was the 60% reduction to the dividend allowance affecting an estimated 2.27 million people, many of whom use the allowance as a way to fund a comfortable retirement.

So for those who rely on dividends as their main source of retirement income, would this change mean they now have to pay tax on their dividend income?

Impact

The reduction of the allowance will take place from April 2018.

The rates on are unchanged, so investors receiving dividends above the tax-free allowance will be taxed at the following rates:

  • basic rate – 7.5%
  • higher rate – 32.5%
  • additional rate – 38.1%.

For example, basic-rate taxpayers who receive £5,000 in dividends will have to pay an extra £225 tax from April 2018, while higher-rate taxpayers will pay an extra £975 on that sum.

Who does it affect?

Business owners and directors who pay themselves in dividends on top of a small salary will be prone to paying more tax as a result of the dividend allowance reduction.

Personal investors, such as pensioners, who turn to dividends as a source of retirement income, could also see themselves paying more tax for the first time.

Allowances and ISAs

If you’re concerned about paying more tax on your income there are options available to protect your hard-earned income from the taxman. 

You can open an ISA, which has an annual tax-free allowance of £20,000, meaning you can add as much money up to the limit and withdraw it free of tax depending on when you want to access the cash and what type of ISA you have.

If you’re a basic-rate or higher-rate taxpayer, you can earn up to £1,000 and £500 respectively in tax-free savings income– depending on your total taxable income per year.

Talk to us

If you have further questions on the dividend allowance, talk to us on 0117 973 3377 or email enquiries@hollingdalepooley.co.uk to speak to an adviser.