How Much Will April Dividend Cut Cost You?

How Much Will April Dividend Cut Cost You?

12 March 2018

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.

The measure was first announced in the Chancellor’s Spring Budget speech this time last year as a way of tackling the tax avoidance issue.

Phillip Hammond said: “People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.”

The move will hit investors as well as owner-managed firms – particularly personal service companies and some family owned businesses.  

Many commentators complained that the Chancellor was comparing employee and non-employee taxation without taking employee perks and benefits into account, labelling the changes unfair.

The current dividend taxation model is relatively new. It was introduced by George Osborne in 2016 and taxes dividends in line with what an individual earns.

Basic rate tax payers pay 7.5% on dividends, higher rate payers pay 32.5% and additional rate payers pay 38.1%.

When the tax free allowance falls from £5,000 to £2,000, how much you lose depends on which tax band your dividend income falls into.

If it falls into the basic rate tax band you will be £225 worse off (7.5% of £3,000). Higher rate taxpayers will be £975 worse off and additional rate payers will have to pay an extra £1,143 each year.

If your £5,000 of dividends sits between two tax brackets then the hit will be reduced slightly.

Other April tax changes

Alongside the change to your dividend allowance, April brings other tax changes that may affect contractors.

Income tax

The income tax personal allowance will increase in April from £11,500 to £11,850 for basic rate payers. This equates to an extra £70 in your pocket next tax year.

By 2020, the personal allowance will increase to £12,500. Higher earners will also benefit from an increase in the higher-rate threshold from £45,000 to £46,350 – a £340 saving.

Council tax

Councils have been prevented from increasing council tax above 2% since 2012. This cap will be lifted this year so local authorities will be able to increase council tax by 2.99%.

Many local authorities will add an additional 3% increase to help fund social care costs. The Local Government Association claims that nearly half of English councils that provide social care will increase council tax by the maximum 5.99% allowed.

Mortgage interest tax relief

Tax relief on mortgage interest payments on second or buy-to-let properties will continue to be phased out – dropping to 50% this April.

The relief will be phased out entirely by 2020, but landlords will be able to claim a 20% tax credit on their mortgage interest.

Capital gains tax

The threshold for capital gains tax, which is paid when an asset you sell has increased in value, will increase from £11,300 to £11,700 from April.

Married couples and civil partners can use their partners’ annual exempt amounts meaning a combined tax-free total of £23,400.

For more information email team@umbrella.co.uk or visit www.umbrella.co.uk