Dividends Crossovers

Who will pay how much more from 2018/19 on dividends?

 “…the Chancellor … announced that the £5,000 tax free dividend allowance, introduced less than a year ago, would be cut to £2,000. To change it so quickly does not look like coherent policy making.”

So said Paul Johnson, the Institute for Fiscal Studies Director in presenting the Institute’s Budget analysis. There are few who would disagree with such a comment. The move, which was the biggest revenue-raiser in the Budget, will create losers but no winners. At best, there will be no more tax to pay for those with dividend incomes up to £2,000. At worst there will be extra tax to pay on £3,000 of dividends for those with dividend income above £5,000.

The effect of the dividend allowance roller coaster is shown in the table below:

payer

(Dividend Rate)

Worse off than in 2015/16 if dividends exceed Maximum extra tax

2018/19 – 2016/17

2016/17 2018/19
Basic (7.5%) £5,000 £2,000 £225
Higher (32.5%) £21,667 £8,667 £975
Additional (38.1%) £25,250 £10,100 £1,143

 

In practice, many of the targeted population – the incorporated self-employed – will be no more than £225 worse off. They will normally have at least £5,000 of dividends in the basic rate band because their pay will only be up to the NIC threshold (probably £8,320 in 2018/19). The reason the higher or additional rate does not bite these incorporated business owners is that the dividend allowance is not an allowance, but a nil rate band. Thus, reducing the allowance does not change the tax payable on dividends above £5,000, it only increases tax on the slice between £2,000 and £5,000.

Although the target for the dividend allowance cut is supposedly the small incorporated business owner, those paying the most extra tax will normally be the richer investor.

 

 
 
 

Lexington Wealth Management