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Family Firms Likely to be Hit Hard By Dividend Allowance Slash

The dividend allowance cut, that will affect contractors across the country, will go ahead from April 2018, now that the Government’s second Finance Bill has been confirmed.

The tax free dividend allowance will be cut from £5,000 to £2,000 from April 2018, in the Chancellor’s bid to create a level playing field on taxes for employees and contractors. However, the changes could hit family businesses particularly hard, if more than one family member takes a dividend payment.

The dividend allowance cut was mooted in the Chancellor’s Spring Budget speech, with Philip Hammond saying: “People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.”

Of course, contracting organisations have countered that employees enjoy a raft of benefits that are not generally available to non-employees.

The current tax on dividends was introduced in April 2016, with dividends subject to tax rates in line with what an individual earns, much like income tax.

Basic rate tax payers pay 7.5 percent on dividends, higher rate payers pay 32.5 percent and additional rate payers pay 38.1 percent.

The current policy also included a dividend allowance of £5,000, so no tax was owed on the first £5,000 that a limited company shareholder received in dividends. This dividend allowance will now fall to £2,000.

So, how much extra you pay will depend on your overall income and it will be determined by which tax band the first £5,000 of the dividends falls into.

For professional advice regarding tax and financial planning in light of such changes, please contact us on: 01792 466428.