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Reduction in Dividend Allowance

A reduction in Dividend Allowance from £5000 to £2000 from April 2018 was announced in the Budget.

The Dividend Allowance means the first £5,000 are charged 0% tax. Additional dividends received over the allowance are to be taxed as follows:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers.

Dividends received within the allowance will still count towards an individual’s basic or higher rate band, and therefore may impact the rate of tax paid on dividends over the £5000 allowance.

To help regulate which tax band a dividend will be, all dividends are to be viewed as the last type of income to be taxed.

In general, the governments assume the reduction in allowance will not greatly impact general investors. However, it will more likely affect family company shareholders who take dividends in excess of the

£2,000 limit. The cost of the restriction in the allowance for basic rate taxpayers will be £225 increasing to £975 for higher rate taxpayers and £1,143 for additional rate taxpayers.

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