By Daniel Lanyon on 8th March 2017
The chancellor Phillip Hammond has slashed dividend allowances from £5,000 to £2,000 in 2018.
The move, Hammond says, is aimed at bringing the self-employed and the employed more in line in terms of taxation.
Company directors make up about half of those using the tax break, Hammond said in his inaugural budget as chancellor, effectively giving them a tax-free income boost. The rest of those using the break are investors with sizeable portfolios of equities and investment trusts. The dividend allowance was only introduced last spring. The new rules will come in April 2018.
Hammond said: “The Dividend Allowance has increased the tax advantage of incorporation. It allows each Director/Shareholder to take £5,000 of dividends out of their company tax free, over and above the personal allowance. It is also an extremely generous tax break for investors with substantial share portfolios.”
Lisa Caplan, head of financial advice at Nutmeg says the cut in dividend allowance now makes ISAs more important than ever for investors.
“The government’s cut to the dividend allowance – from £5,000 to £2,000 – makes ISAs more important than ever. Any dividend income above £2,000 will now be subject to income tax,” she said.
You don’t need a massive portfolio to have a dividend income of over £2,000 - only around £50,000," she added.
"Today Philip Hammond has delivered one of the least interesting Budgets in recent memory. Other than protection for SMEs from the potential large rates increase, very little was announced of relevance to SMEs, or indeed their lenders. Hammond has missed a chance to take a fatal flaw out of the Innovative Finance ISA that prevents investors investing across multiple P2P platforms in the same tax year - leaving investment diversification very difficult for people.
“As the first post-referendum Budget the focus ought to have been on what the Government’s economic plan is for our departure from the European Union. However, as expected, Hammond took few chances and left us with as many questions as answers.
“Eight months have now passed since the Brexit vote, and even after today’s Budget, businesses and investors are none the wiser on what the long-term implications will be. Like other sectors, the P2P market needs a clear strategy outlined by the Government so that we can plan accordingly.”