The surprise move by Chancellor Philip Hammond to slash the tax-free dividend allowance in today’s Budget has been lambasted by the industry.
The tax break on the first £5,000 of dividend income in each tax year was only introduced in April 2016. From April 2018, the tax-free dividend allowance will drop to £2,000.
Ben Yearsley, investment director at Wealth Club, says with National insurance increasing from 9 per cent to 10 per cent from April 2018, “the self employed and investors are seemingly funding the budget giveaways”.
“The increase in national insurance contributions for the self employed will hit millions of individuals. The slashing of the tax-free dividend tax allowance from 2018/19 will hit investors hard. In fact according to Budget papers it will raise £870m in that tax year alone.
“In the 2015/16 tax year basic rate taxpayers didn’t pay tax on their dividends, they will now get two years of a tax free £5,000 allowance before being hit by this massive reduction and increase in their bills. The only upside is that the ISA allowance was confirmed as £20,000 from next month.”
Toby Ryland, corporate tax partner, HW Fisher & Company, says the reduction in the dividend allowance will also hit small business owners.
“[It is] a huge frustration for small business owners is the lack of consistency from the Government. Not so long ago, the Government was encouraging people to incorporate via the tax-free dividend allowance and now, by reducing it, it is giving out the exact opposite message.”
Schroders’ Sue Noffke, fund manager, UK Equities, says it is important the Chancellor doesn’t shoot himself in the foot by hampering innovation among the self-employed.
She says: “The Chancellor has moved to address the tax discrepancies that exist between employees and the self-employed. This could act as an extra avenue of tax receipts with the Chancellor having very little wriggle room to boost any other areas. But, at the same time, it is crucial that this is not to the detriment of the growth and innovation of what is, in large parts, a burgeoning sector, as displayed by the growth of the ‘gig economy’.”