Cut to DividendAllowance: Is it going to affect you? In the government’s second financebill that was confirmed last month, dividend allowance will be cut by £3,000 fromits current level at £5,000.
Contractors could be worse off by£1,143 as the Chancellor continues to raid down the contracting sector.Phillip Hamood first spoke aboutthe dividend cut in the Spring Budget speech where he said, “People should havechoices about how they work, but those choices must not be driven primarily bydifferences in tax treatment”.The Chancellor believes that taxtreatment must be the same for both employees and non-employees.
There hashowever been a backlash from contracting organisation who say that employeesenjoy a lot more benefits than non-employees. As the dividend allowance cut didnot appear in the first Finance Bill immediately after the general election,people were of the opinion that it might be scrapped along with Class 4 (self-employed)National insurance contributions increase. However, this dividend policy didre-appear in a subsequent bill and has been passed. Dividend AllowanceThe dividend allowance is afairly new introduction to the tax system. It was introduced in the year 2016and it implies that dividends are subject to tax in line with what theindividual earns.There are three dividend taxrates, with basic rate tax payers paying dividend tax at 7.5%, higher andadditional rate tax payers paying 32.
5% and 38.1% respectively.Like personal allowance, there isa “dividend allowance” of £5,000. It meant that the first £5,000 of dividendincome is not taxed for limited company shareholders getting paid in dividends.However, this sum is still taken into consideration for overall tax purposes. Starting April 2018, this dividendallowance will fall to £2000. Is it going to affect you? If yes, how much?Your overall income (savings,dividend and non-dividend income) will determine how much tax you pay on thedividends you get in 2018 with the allowance reduced from £5,000 to £2,000. Thedividend tax will primarily depend on which tax band the first £5,000 falls in.
For a basic rate tax payer, thisreduction would lead to an increase in dividend tax by £225. Higher rate and additionalrate tax payers would be worse off by £975 and £ 1,143 respectively. If the dividends (£5000) fallbetween two tax bands, then the above figures will change. Conclusion: The dividend policy changes could particularly affectfamily businesses where multiple family members take dividend payments. Thesepeople could be far worse off.