Spring Budget 2017: Tax free dividend allowance slashed to £2,000

The Chancellor announced plans to reduce the tax-free dividend allowance from £5,000 to £2,000 from April 2018. This change impacts savers who have holdings of over £50,000.

What is a dividend allowance?

The dividend allowance is when there is no tax to pay on the first £5,000 of your dividend income that you get in the tax year. Any dividends above the amount are currently taxed at 7.5% (basic rate) 32.5% (higher rate) and 38.1% (additional rate).

Les Cameron, head of technical at Prudential, says: “The previous dividend allowance of £5,000 allowed investors to hold around £150,000 of equity-based portfolios tax free. Today’s announcement of a reduction of this allowance to £2,000 will slash the size of the portfolio that can be held tax efficiently by over 50 per cent.

Dividend allowance cut makes ISAs and SIPPS more important for investors

The reduction in the dividend allowance is a reminder that using tax wrappers such as ISAs and pensions is important.

Adrian Lowcock investment director at Architas says: “Investors do have some time to act and each adult has two ISA allowances to use before the cut comes into effect. This tax year the ISA allowance is £15,240 until the 5 April and then from 6 April they have a fresh £20,000 ISA allowance which they can use until 5 April 2018.”

Tom Selby, senior analyst at AJ Bell commenting on the annual dividend allowance reduction says it has been “put to the sword” by Philip Hammond less than a year after his predecessor George Osborne introduced it.

He adds the cut will make it even more important that investors make full use of the tax allowances available through ISAs and SIPPs.

Selby says: “In particular investors will need to think carefully about which investments they hold inside and outside of tax wrappers. They will want to ensure that high dividend paying investments are held within ISAs and SIPPs to minimise the impact of the dividend allowance cut.”

The reduction will increase tax bills

So what impact will the reduction in dividend allowance have?

Simon Bashorun, financial planning team leader at Investec Wealth and Investment explains the government has for some time looked to address inequalities in the income tax regime and adapt it.

Bashorun says: ” The proposed reduction will also increase the tax bill for investors who hold stocks and shares investments yielding over £2,000 per annum outside of their ISAs. In many cases, there will now be a need to review portfolios only recently adjusted to take into account the £5,000 dividend allowance.”

Written by London-based journalist Tanzeel Akhtar. Her work has been published in the Wall Street Journal, FT Alphaville, CNBC, Citywire, Euromoney, Interactive Investor.