On Friday, (8 September) the UK government published its 2017 Finance Bill which contains a range of measures that will have an impact on both savers and investors.
Many of the now approved changes contained in the Bill were announced in the Spring Budget but were postponed due to the announcement of the snap general election. Among the many key measures dropped at that stage, was the reduction of the tax free dividend allowance from £5,000 to £2,000. This was however, reintroduced in the new Bill and it is proposed that this reduction to the allowance will come into effect from April 2018, so the next tax year (2018/19).
This will affect individuals who receive dividends from shares and the self-employed who may pay themselves by way of dividends through a limited company.
The initial introduction of the tax free dividend allowance of £5,000 saw investors with investment share portfolios of approximately £200,000 receive their dividends tax free; the intention being that those with modest incomes from investments would not be taxed. However, the reduction in the allowance to £2,000 will have a significant impact, with 7.5% of income tax for basic-rate taxpayers being due on the balance of £3,000 of dividend income, resulting in a tax liability of £225 from the 2018/19 tax year. For higher rate tax payers there will be a tax charge of 32.5% and 38.1% for additional-rate taxpayers which is additional tax of £975 and £1,143 respectively.
To add another layer of complexity and a further burden for many tax payers on lower incomes, is the possible requirement, depending on the individual’s circumstances, to complete a Self-Assessment Tax Return to disclose their dividend income over the £2,000 tax free limit, whereas, from 2016/17 with the introduction of the higher £5,000 limit, many were removed from the Self Assessment tax regime as there was no criteria to file a return, nor was there any tax liability.
If you feel the change in the level of the tax free dividend allowance may affect you, please contact Laura Brown, our Head of Tax for more information (0131 225 1200). Our Tax Team can complete any necessary Tax Returns or carry out a simple review of your income position to ensure that your affairs are structured in such a way as to keep your affairs simple and efficient.