2018 Tax-Free Dividend Allowance Changes

Dividend Allowance Changes

As with every year, April 2018 brings a number of new changes in the accounting world. One of the biggest changes likely to affect business owners who pay themselves a small salary along with dividends is the tax-free dividend allowance cut. The new tax year will see the amount of dividends directors and shareholders can take without getting taxed fall from £5,000 to £2,000, but how will this significant cut impact small businesses across the UK?

As a leading accountant, we work with businesses of all sizes and sole traders serving all sectors throughout the North East of England. As well as providing a vast number of accounting and payroll services, we keep abreast of the very latest changes regarding how the clients we serve are taxed. Needless to say, the 2018 tax-free dividend allowance changes have provided essential reading for our team. In this blog post, we reveal what to expect from the change.

Why the big change?

Described by the Federation of Small Businesses as “a further disincentive for businesses to invest and grow”, the dividend allowance cut is no doubt bad news for SMEs based throughout the country. As our departure from the European Union looms, many businesses will already be wanting to prepare their companies and their finances for the uncertainty that is predicted to follow. The change is forecast to raise income for the Treasury to £930 million in 2021/22, and will immediately mean £225 more tax for basic rate tax payers receiving £5,000 of dividends as soon as it comes into effect in April 2018.

Higher rate tax payers will be hit further. The change will mean they will pay an extra £975 in tax per year. Sole traders will also be impacted by the changes to the tax-free dividend allowance alongside limited companies, all of which will face higher tax bills.

Wasn’t the allowance only just introduced?

The dividend allowance of £5,000 was only announced in 2015 and introduced in spring 2016. Brought in by ex-Chancellor George Osborne, the allowance boost was designed to compensate for the higher tax rate. The impending cut will however be the biggest tax raiser in new Chancellor Philip Hammond’s most recent Budget.

The change will affect 50% of all directors and shareholders of privately owned businesses, whilst removing the generous but unfair tax break being enjoyed by investors with large share portfolios according to Hammond.

Want to know how the 2018 tax-free dividend allowance changes will affect you and your company? Contact our accountants today for support or further information regarding our accounting services.