From 6 April 2018, the tax-free allowance on dividends will be reduced from £5,000 to £2,000.
Owner-directors have used the dividend allowance to extract profits from their business, but changes over recent years have seen the advantage of this tax-efficient strategy reduce.
The reduction will almost certainly result in business owners, directors and shareholders paying more tax on dividends worth more than £2,000 in 2018/19.
Under the new allowance, the first £2,000 taken in dividends will be tax-free, but anything above it will be taxed according to the taxpayer’s income tax band. Although the allowance is set to change, tax on dividends will remain at the same rates for 2018/19.
For dividend-only income, the following rates apply:
| ANNUAL SLICE OF INCOME | TAX RATE |
|---|---|
| Up to £11,850 | nil |
| £11,851 – £13,850 | 0% |
| £13,851 – £46,350 | 7.5% |
| £46,351 – £150,000 | 32.5% |
| More than £150,000 | 38.1% |
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