Dividend allowance reduced
The dividend allowance is reduced from £5,000 to £2,000 with effect from 6 April 2018.
The dividend allowance is effectively a zero-rate band and dividends that are covered by the allowance are received free of tax. All individuals are entitled to a dividend allowance, regardless of whether they pay tax at the basic, higher or additional rate.
Many personal and family companies extract profits in the form of dividends once a small salary has been taken. Where possible, it is advantageous to ensure that the dividend allowance for 2017/18 is not wasted and, if necessary, declare and pay a dividend prior to 6 April 2018 in order to mop up any unused dividend allowance.
Assuming dividends of at least £5,000 are taken each tax year, the reduction in the dividend allowance from £5,000 to £2,000 will increase the tax paid on dividends by a basic rate taxpayer by £225, that payable by a higher rate taxpayer by £975 and the dividend tax payable by an additional rate taxpayer by £1,143