Business owners could lose out through new cut to Dividend Allowance

Business owners could lose out through new cut to Dividend Allowance

Owners of limited companies could lose out on more than £1100 under tax changes to the dividend allowance which come into force this month.

Dividends can be a tax efficient way for companies to distribute profits, and a tax free allowance was introduced in 2016 which particularly benefitted smaller shareholders.  The allowance applied to the first £5,000 of dividend income and is available to all taxpayers, irrespective of their overall level of income.  Dividends above the tax free threshold are taxed at special rates, slightly below the rates applying to other forms of income.

As of April 2018, however, the tax free dividend allowance will be cut from £5,000 a year £2,000, meaning shareholders will take a financial hit, the size of which depends on which tax band their dividends fall into.

Jacquelyn Kimber, Tax Partner at Newby Castleman, said:

“Company owners, who have come under increased financial strain in recent years due to changes in dividend taxation, are set to lose out even further under the imminent cut to the Dividend Allowance.


“For example, if their dividends fall into the basic rate band, they will be £225 worse off (7.5% basic rate dividend tax x £3,000), while the changes will cost higher-rate taxpayers £975, and additional-rate taxpayers £1,143. 

“The real losers though are those who receive modest levels of dividend income, below £5,000 who were not previously required to fill in a tax return and who will now be pushed back into the self-assessment system. This seems at odds with HMRC’s stated wish to take taxpayers with minimal sources of non-PAYE income out of self-assessment.”

Jacquelyn concluded,

“There have been huge changes in the way dividends are taxed in recent years, and this latest tinkering with the dividend allowance, which was only introduced two years ago, is a particularly unwelcome move.  For a full, comprehensive review of your income tax affairs we would recommend speaking to a professional financial advisor.”

Newby Castleman is one of the Midlands’ leading independent accountancy firms, with offices in Leicester and Loughborough. It offers a range of specialist financial services, business and tax advice for individuals and businesses. For further information, telephone the Leicester branch on 0116 254 9262, the Loughborough branch on 01509 263500 or visit the website at

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