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Changes to Dividend Tax

Tax Free Dividend Allowance To Be Reduced to £2,000

In the March 2017 Budget, the Chancellor, Phillip Hammond, announced measures to limit the rise in tax-driven incorporation.

The £5,000 tax free dividend allowance introduced by George Osborne will be reduced to just £2,000 from 6 April 2018. Mr Hammond claimed that many smaller owner-managed businesses have incorporated as limited companies mainly for tax reasons. Typically the director/shareholders of such businesses have paid themselves in dividends and paid less tax than similar unincorporated businesses.

Currently, once the dividend allowance has been used the remaining dividends are taxed at 7.5%, 32.5% and then 38.1% depending upon whether the dividends fall into the basic rate band, higher rate band or the additional rate. There are rumours that these dividend rates may also be increased in future years.

Although the cut in the tax-free dividend allowance is clearly aimed at owner managed companies, it will also impact on those with substantial share portfolios.

It’s not all bad news though – the annual ISA investment limit increases to £20,000 from 6 April 2017 and dividends on shares held within an ISA continue to be tax free.

To discuss how the changes in dividend tax could affect you and your business, please get in touch with one of the team.

So should we give shares to children and pay £5,000 dividends tax free?

The introduction of the £5,000 tax free dividend allowance has tempted many family company shareholders to give shares to other family members so that they can be paid £5,000 a year tax free. (£2,000 from 6 April 2018).

Such a strategy needs to be carefully structured as there can be Capital Gains Tax on the gift of shares, and HMRC may also seek to tax the dividend as employment income under certain circumstances. The dividend will also be taxed on the parents if received by a child who is a minor.

If you are considering giving shares to other family members and then paying dividends, please come and talk to us first.

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