Whilst it was hoped that the proposed reduction in the dividend tax allowance from £5000 to £2000 would not go ahead in 2018, after reference to it failed to appear in the 2017 Finance Bill, hopes have been dashed by government plans to legislate for it in the second Finance Bill to be published this Autumn.

The dividend tax regime was introduced in April 2016 and created a tax liability for shareholders whose dividend income exceeded £5000. The Spring Budget 2017 announced that the £5000 threshold would be slashed to £2,000 for dividends paid on or after 6 April 2018. The outcome for individual shareholders means that they could be worse off by £225, £975 or £1,143 a year depending on their tax rate. For a couple running their own family business, this is doubled to £450, £1950 or £2286 depending on their tax rate.

A 1% cut in corporation tax has helped to alleviate the effect of an increase in the dividend tax but as more dividends are paid then the rate of dividend tax will increase substantially.

We would urge business owners to consider taking their dividend payments before 6 April 2018 to benefit from the current dividend tax-free allowance of £5,000 before it falls.