Reduction to the tax-free dividend allowance – April 2018

From 6 April 2018, the tax-free dividend allowance fell from £5,000 to £2,000. We’ve received quite a few questions around this so we thought it was worth reminding you about the reduction which was included in the Finance Act 2017.

From 6 April 2018, the dividend allowance (DA) taxes the first £2,000 of dividend income at nil, then:

  • 5% basic rate taxpayers
  • 5% higher rate taxpayers
  • 1% additional rate taxpayers

Dividends are taxed as the ‘top slice’ of income, once any general income (salary, business profits, pensions) and interest income have been taxed. These latter forms of income usually use up the personal allowance (currently £11,850 for 2018/19; £11,500 for 2017/18).

Most allowances operate on a ‘use it or lose it’ basis and can’t be carried forward for offset against future income. It is therefore important that from a tax perspective, individuals take advantage of these tax-free allowances and reduce their tax exposure wherever it is practical and possible to do so.

It’s also worth noting that the Basic Rate Band increased by £1,000 to £34,500 from April 2018.

We advise many owner-manager clients on dividend taxation and prepare the relevant dividend paperwork to ensure all Companies House & HMRC compliance procedures are met. Despite the reduction in the tax-free dividend allowance, it is always worth re-examining your tax affairs to identify any areas where savings can be made. Owner-managers of companies should certainly do this, along with a review of their pension contributions, given the changes to this area too.

The next Budget will take place this Autumn and we’ll bring you details of the key changes to taxation affecting individuals and SME businesses. In the meantime, take a look at our website to see how we can help you and your business.

To discuss your tax position and how the changes to the dividend allowance are likely to affect you, please contact [email protected] or call 01527 558539 for clear, up to date advice. HMRC website has more guidance on dividend taxation.

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