Dividend Allowance Reduction

How will the dividend changes affect you?Dividend allowance reduction

 

As you may be aware the tax free dividend allowance is due to be cut from £5,000 to £2,000 in April 2018, so how will this affect you?

 

How you are affected financially by the cut, will depend on which tax band the first £5,000 of your dividends fall into.

If they fall into your basic rate band, you will be £225 worse off (7.5% basic rate dividend tax x £3,000). The reduction will cost higher-rate taxpayers £975, and additional-rate taxpayers £1,143. ,

If the first £5,000 of your dividends fall between two tax bands, the total extra tax will vary from the above figures.

So, if you receive a low salary, such as the basic director’s salary, and don’t have significant other income during the tax year, the final tax hit is likely to be £225.

 

Example:

Salary £8,424, Dividends £25,000

  • The salary is covered by the £11,850 personal allowance
  • There is £3,426 remaining of the personal allowance, so the first £3,426 dividends are covered by this and therefore tax free.
  • The next £2,000 dividends are covered by the tax free dividend allowance.
  • £19,574 dividends remain and are taxed at 7.5%, giving a total tax bill of £1,468.05.

If you would like any further clarification please do not hesitate to contact us.

Lucy

 

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