In the Spring 2017 Budget it was announced that from April 2018 the amount of tax-free dividend payments an individual could receive as a shareholder would be slashed from £5,000 to £2,000. This proposal was put on hold by the general election, however, it was reintroduced and will proceed as planned from April 2018.
The result will be that a further £3,000 of income received from dividends will be taxed on the shareholder at their dividend rate. This could result in as much as a further £1,143 in tax being payable by an additional rate taxpayer in 2018/19!
Dividend Income – how is it taxed and how do the changes affect UK shareholders?
Many individuals first experienced being a shareholder in the 1980’s following the privatisation of many utility companies, for example British Telecom and British Gas (The “Tell Sid” campaign is remembered by many to this day), followed by the local water and electricity companies.
More individuals became shareholders as they received shares as the UK’s major building societies became banks and as employing companies used share incentive plans to incentivise and retain employees.
This growth in the shareholding population was encouraged by rewarding a large number of UK basic rate paying taxpayers with relatively small amounts of dividend income being paid to them without the need to deduct any further tax.
It should be remembered that dividends are paid from a company’s profits, the profits which have already had tax paid on them. Effectively a shareholder is paying up to 38.1% additional rate income tax on a company’s profits which have already suffered 20% corporation tax!
Until April 2015 a credit was given to the shareholder as an acknowledgement of the corporation tax paid, effectively restricting additional tax liabilities on dividend income to only those taxpayers paying higher or additional rates of tax. This credit was scrapped and replaced by an individual tax-free allowance, limiting the amount of dividend income all taxpayers receive without paying tax to £5,000.
This tax-free allowance will be reduced to £2,000 in April 2018.