Is this dividend allowance cut still going ahead?
Although this dividend allowance cut was dropped from the Finance Bill 2017 as a result of the General Election, it will go ahead as planned from April 2018, as it was re-introduced into a second Finance Bill (published on 8th September). The Bill received Royal Assent on 16th November 2017.
What is the dividend allowance?
The dividend allowance was only implemented in April 2016, as part of a radical shake-up in the way dividends are taxed. Prior to this date, under the tax credit system, dividends were paid to shareholders net, and multiplied by 10/9 to produce the gross dividend upon which dividend tax was levied.
Since the new rules came into play in April 2016, dividends are subject to new tax rates (basic – 7.5%, higher – 32.5% and additional – 38.1%). This has placed a significant additional tax burden on limited company owners. The one concession was the creation of a tax-free ‘dividend allowance’ applied to the first £5,000 of dividend income.
So, the first £5,000 of dividends are not taxed at all, but significantly, this sum still sits within the relevant tax band for overall taxation purposes.
How much will the dividend allowance reduction cost you?
From April 2018, the dividend allowance will be reduced from £5,000 to £2,000. How you are financially affected by the cut depends on which tax band the first £5,000 of dividends fall into. If they fall into your basic rate band, you will be £225 worse off (7.5% basic rate dividend tax x £3,000). It will cost higher-rate taxpayers £975, and additional-rate taxpayers £1,143.
Of course, should the first £5,000 of dividends fall between two tax bands, the total tax hit will vary from the above figures. If you receive a low salary, and don’t have significant extra income during the tax year, the final tax hit is likely to be £225, assuming the Chancellor isn’t tempted to meddle further with dividend taxation before the current implementation date.
Other tax changes affecting you from April 6th 2018
Personal allowance increases
The amount you can earn before paying tax rises from £11,500 to £11,850. It’s the latest step in a planned rise to £12,500 by 2020.
Higher rate tax threshold increases
The threshold at which you start paying 40% tax will rise from £45,000 to £46,350, unless you are a Scottish taxpayer (see below). The government currently plans to raise it to £50,000 by 2020.
Marriage allowance rises
The allowance will rise from £1,150 to £1,185, enabling married couples to transfer this portion of their personal allowance from the lower earner to the higher earner, in order to save tax. To qualify for the scheme, the lower earner must have an income below the personal allowance and the higher earner must be a basic rate taxpayer.
Pensions lifetime allowance rises
Since 2010, the pension lifetime allowance has been gradually cut from £1.8 million to £1 million. In April it will rise in line with inflation to £1.03 million.
State Pension rises
The pension will rise in line with last September’s inflation figure of 3%. For those on the full ‘flat rate’ pension this will add £4.80 a week, or £249.60 a year. For those who reached State Pension age before April 2016, the full Basic State Pension will rise to £125.95 a week.
This will be a welcome change for retired households struggling with rising costs, particularly given that ONS figures in December showed that retired households face faster inflation than their working counterparts.
Junior ISA allowance rises
The Junior ISA allowance will rise with inflation from £4,128 to £4,260. The JISA has been in place since 2011, and the allowance has risen annually since then from £3,600 to £4,260.
LISA transfer rules change
At the end of the 2017/18 tax year, the rules regarding transfers from Help to Buy ISAs to Lifetime ISAs will change, so it’s worth considering a transfer before the new tax year.
Under the current rules, you can transfer anything built up in the Help to Buy ISA before April 2017 into a LISA, along with any interest accrued on this amount since 6 April 2017, without using any of your 2017/18 allowance. You can then transfer anything subscribed since then using your 2017/18 allowance, top it up to £4,000 and get the government 25% bonus on the full amount. From the next tax year, all transfers will use up that year’s allowance. Before transferring make sure you will benefit and not incur excessive exit penalties. Any money withdrawn from a LISA other than for an eligible house purchase or after age 60 is normally subject to a 25% government withdrawal charge, which means you could get back less than you put in.
Auto-enrolment minimum contributions increase
At the moment minimum contributions are set at 2% of your qualifying earnings (with at least 1% from your employer), but from 6 April they will rise to 5% (with at least 2% coming from your employer). This is actually the first of two increases, because in April 2019, they will go up to 8% (with at least 3% from your employer).