Tax Free Dividend Allowance to fall by 60%

Tax Free Dividend Allowance is set to fall in April 2018

We are advising our clients to be sure to make the most of this year’s tax free dividend allowance before it falls by 60%, which is anticipated to happen in April 2018.

What is a Dividend?

A dividend is a distribution to shareholders of post-tax retained profits. This is built up in a limited company’s accounts from the date of its incorporation.

Recent changes to the way in which dividends are taxed mean that the first £5,000 of any dividend received by an individual is tax free. Above this allowance, dividends will be taxed at 7.5 % for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

These are the rates that apply for the fiscal year to 5 April 2018. The creation of the dividend allowance of £5,000 tax free has led to many owner managers creating what has become know as alphabet shares to ensure family members are able to take advantage of their dividend allowance entitlement. Great care needs to be taken over the way in which alphabet shares are created and the rights attached to them. When properly done, this can be a very effective way of generating tax free income from the Company.

Changes to Tax Free Dividend Allowance

However, in a measure designed to reduce the tax gap between those who are employed and those who run their own Limited Companies the Chancellor has announced that the current £5,000 annual dividend allowance will be reduced to £2,000 with effect from 6 April 2018. The effect of this will be to increase the tax charged on many individuals in owner managed businesses by 7.5% of £3,000. A further tax charge of £225 per person per annum.

There is therefore a short term planning opportunity to take advantage of the annual dividend allowance entitlement. Whilst it is at its current level of £5,000 before what is a very significant cut in the level of this benefit which will apply from the next fiscal year. Just remember you will need to be sure that you have sufficient distributable net profit available in your business after payment of your corporation tax liability in order for you to do this.

As always, please do not hesitate to contact us for further information about your specific situation.

December 7, 2017

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