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After wrapping up their tax affairs for the 2018/19 tax year, many limited company contractors will only now be waking up to the reality of the 2018 dividend allowance cut, which saw the tax-free dividend allowance drop from £5,000 to £2,000.
In 2018/19, this tax-free allowance was applied to the first £2,000 of dividend income. Above £2,000, dividends are taxed at a flat rate according to the tax band they fall into.
The government’s second Finance Bill has been confirmed, meaning that the tax free dividend allowance will be cut from £5,000 to £2,000 from April 2018.
The cut could cost contractors up to £1,143 a year as the Chancellor continues with his raid on self-employed finances.
The dividend allowance cut was first mentioned in the Chancellor’s Spring Budget speech. Phillip Hammond said: “People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.”
Philip Hammond’s final Spring budget statement was met with fury from the self-employed community when the Chancellor broke a manifesto promise and increased taxes on the self-employed.
A cut in dividend allowance will cost some contractors more than £1,000 per year when it takes effect from April.
The allowance on dividends will be cut from £5,000 to £2,000 as the chancellor continues his raid on self-employed finances.
This means that individuals will not pay taxes on the first £2,000 of dividend income, regardless of what non-dividend income they have.
In a bid to rush their latest Finance Bill through the House of Commons before the snap general election this June, the government stripped out some key parts of its tax agenda, including the Making Tax Digital scheme.
The revised Finance Bill, which was passed through the Commons on Wednesday, was 80% shorter than the original document, but one thing that wasn’t cut from the revised bill was the controversial IR35 reforms for public sector contractors.
The way that dividend income is taxed for company owners is changing in April. The abolition of the Dividend Tax Credit and the introduction of a tax-free Dividend Allowance will have positive or negative consequences depending on your situation.
It is important that you are aware of – and prepared for – the upcoming changes.
For many small and medium sized company owners, receiving dividends tends to be a more tax efficient means of income than receiving a salary. But this advantage will reduce after April.
