It can’t have escaped your notice that business owners who pay themselves dividends on top of a small salary are being hit hard by the Budget.
If you are in receipt of dividend income in excess of £2,000 the reduction in dividend tax allowance will mean that you will be facing higher tax bills. The Government has estimated that this will affect around 2.27 million individuals in 2018/19 and that the average increase in tax liability will be around £315.
From April 2018, the total amount of dividends that a shareholder can receive, tax-free, will fall from £5,000 to £2,000. This means that a basic rate tax payer who receives £5,000 in dividends will pay an extra £225 in income tax from April 2018 and a higher rate tax payer an extra £975.
The dividend allowance of £5,000 was announced by previous Chancellor George Osborne in July 2015, prior to this reform, which came into effect from April 2016, basic-rate taxpayers paid no income tax on dividend income. Phillip Hammond has said that the announced cut was necessary to “address the unfairness” around the dividend allowance, which he has described as being “an extremely generous tax break for investors with substantial share portfolios“.
This change has been presented as part of Mr Hammond’s wider aim of bringing taxation of the self-employed and small business owners into line with that of employees. Whilst the Chancellor has argued that the greatest beneficiaries of the ‘perk’ are either director-shareholders or wealthy savers with share portfolios worth more than £50,000 it is also the case that many small business owners, including those on modest incomes, will see a significant rise in their tax liabilities.
It is possible to protect yourself to a certain extent by utilising the more generous tax-free ISA and pension allowances. For investors, the move will only affect any savings held outside of an ISA with any investments held within an ISA or pension unaffected.
If you are a business owner who operates using this model and need advice on how to plan for and manage the change please do not hesitate to get in touch with one of the team at JRW.