Budget 2017 Dividend Tax Allowance

Budget 2017

Dividend Tax Allowance Cut

The tax free dividend allowance of £5,000 pa will be reduced to £2,000 pa in April 2018.

This will cost basic rate tax payers up to £225 per year, higher-rate taxpayers up to £975 per year and additional-rate taxpayer up to £1,143 per year in additional taxes if you receive £5,000 or more per year in dividends.

The government claim this will be fairer to most investors given that 80% of equity/share investors will still pay no tax and added this the increase in the yearly ISA allowance to £20,000 will offset this as you can still own shares inside your ISA tax free.

We suggest, this is really about aligning the tax affairs of an employee with those of an entrepreneur who sets up a limited company and pays themselves a lower PAYE income and the balance in dividends from profits.  It makes sense to do this as entrepreneur directors technically get an additional tax free allowance of the £5000 in “income” tax free and then only pay 7.5% dividend tax up to the higher rate tax threshold.

Whereas employees pay 20% income plus employees National Insurance 12% (up to an upper earnings limit and then 2%) and indeed employers National Insurance on all at 13.8%.

Before employees start moaning that small company director/entrepreneurs still get away with it at just 7.5% dividend tax for basic rate tax payers, don’t forget that higher rate and additional rate tax payers pay 32.5% and 38.1% respectively as well as their limited company has also paid 20% corporation tax.

State Pension Age

Council Tax

Stealth Tax

Personal Allowance

Self Employed

Savings Bond

QROPS Tax

Dividend Tax