All that you need to know about the tax free dividend allowance cut

As you’d already know, from the beginning of the new financial year (6th April, 2018) your dividend allowance will be slashed from £5,000 to £2,000. This move will primarily affect the owners of the small business who get their remunerations from dividends instead of a salary. This move is also likely to affect investors whose dividends are held outside the ISA or the pensions. In case you’re wondering what else this dividend allowance is all about, here’s a detailed insight on everything you need to know.

What is the dividend allowance?

The tax free dividend allowance was first introduced in April 2016 in an attempt to re-structure the taxation of the dividends.

Under the old taxation system, the net dividends were paid to the shareholders, after which they were multiplied by 10/9 to get the gross dividend. The tax was then levied on the gross dividend.

As the new taxation rules were implemented after April 2016, your dividends will now be subjected to the new taxation rates.

What Will Be The New Taxation Rates?

As of now, if your dividend income crosses the £2,000 mark, it’ll have a basic tax rate of 7.5%, higher tax rate of 32.5% and additional tax rate of 38.1%.

Who will be affected by the Move?

It is presumed that the directors or the shareholders of private companies who pay themselves via dividends instead of a salary will be significantly affected by this move. In addition to this, the new policies will also have an impact on the investors who have portfolios recording an income of more than £2,000 covered outside their pensions or ISA.

Investors won’t need a big portfolio to get their dividend income crossing the £2,000 cap. It has been observed that amounts around £50,000 in shares can typically produce this sum.

As per the reports of accountant Blick Rothenberg, tax payers with higher rate taxes whose investments generate more than £5,000 dividends every year will have to pay a tax of £975 after this change. Similarly, an additional rate tax payer will be charged £1,143 more. The basic rate investors will be charged the minimum amount of £225.

How to beat the cut?

If you are the director of a small business or a private company, start accelerating the dividend amounts so that you’re able to make the most from the existing tax free threshold of £5000 before the cap is reduced by 6th April.

In addition to this, you can also structure your salary so that you have a tax-friendly mix of dividend and pension contributions. In certain cases, tweaking your dividend to the pension contribution department can also save you a significant tax amount during the financial year of 2018-2019.

Make the Most from Your ISA

If you’re an investor who receives dividends on their investments, always remember that these changes in your dividend allowance will only be applicable for your shares held outside the ISA or pensions. This means the dividend income you get within your ISA/pension will be completely tax free. Ideally, you can also make the most from your ISA allowance at the beginning of the subsequent financial year. In addition to this, you can also use your partner’s allowance or your pension allowance.

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