The true extent of the dividend allowance cut

In the News  |     |   Money Marketing

Danby Bloch

Understanding the taxation of dividends is crucial to giving the right advice to both investors and business owners. This is especially true now following the changes to taxation seen last year and the upcoming cut in the dividend allowance. So here is a brief run-through of the main rules.

The dividend allowance, introduced last year, was one of the biggest changes in this area of advice. And it is to change again in a year’s time. At the moment, it means the first £5,000 of dividends you get are taxed at nil per cent. From 2018/19 this reduces to £2,000. Simple enough.

But using the word “allowance” in this context is a bit misleading. This is because it is not like the personal allowance; it does not create a slice of income that pushes up the point at which the basic rate tax band starts.

If all your income were dividends, the first £11,500 would be free of income tax because of the personal allowance. The next £5,000 would be tax-free thanks to the dividend allowance. Above that, your dividends would be taxed at 7.5 per cent up to the higher rate tax threshold of £33,500 on top of the personal allowance.

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