The Chancellor Philip Hammond has announced the tax-free dividend allowance will fall from £5,000 to £2,000 a year from April 2018.
The Chancellor said the allowance was being cut to “reduce the tax difference between the self-employed and those working through a company”.
This latest cut means the allowance has suffered a rather dramatic fall from grace, falling all the way from £10,000 2014-15.
Chancellor announces a reduction in the tax-free dividend allowance from £5,000 to £2,000 from April 2018 #Budget2017
— HM Treasury (@hmtreasury) March 8, 2017
Commenting on this policy u-turn, Chas-Roy Chowdhury, head of the ACCA, noted: “I would be concerned if this meant that the government is considering removing the allowance altogether when it was originally proposed as an offset for increases in dividend taxation. If it is removed altogether, the taxation on dividends should be reduced.”
The cuts were presented by the Chancellor as a means of halting the “proliferation of incorporation,” in situations where they were seen to being set up specifically to take advantage of the tax break.
Toby Ryland, a corporate tax partner at HW Fisher, has called the Chancellor’s change of tack “a huge frustration for small business owners”. Ryland also criticised what he sees as a lack of consistency from the Government. “Not so long ago, the Government was encouraging people to incorporate via the tax-free dividend allowance and now, by reducing it, it is giving out the exact opposite message.”
The allowance, the Chancellor also argued, was unfair. “It allows each director or shareholder to take £5,000 of dividends out of their company tax-free, over and above the personal allowance,” said Hammond. “It is also an extremely generous tax break for investors with substantial share portfolios.”
Reduction in tax-free dividend allowance from £5k to £2k a bit of a game-changer. Didn’t expect that. #budget2017
— Dan Howdle (@DanHowdle) March 8, 2017
Generally speaking, it wasn’t the best Budget for small business. On top of the cut, the Chancellor announced that self-employed workers will pay increased national insurance contributions from April next year. The rate will increase by 1% to 10% in April 2018.