FSB: Leave Dividend Allowance alone

11th September 2018 | News

The Federation of Small Businesses (FSB) has voiced its fears that the Treasury could drastically cut the tax-free Dividend Allowance for directors and investors in the forthcoming Autumn Budget 2018.

The FSB is concerned that Chancellor Philip Hammond – who has yet to announce a date for the Budget – is being tasked with another tax grab to fill the funding gap for the NHS.

In the Chancellor’s 2017 Budget, the Dividend Allowance was slashed by 60% from £5,000 to £2,000, a move which has been in effect since April 2018.

Mike Cherry, Chairman of FSB, believes the Treasury could hit the Dividend Allowance again to generate £1.3bn in additional revenue for the NHS by 2022. That’s on top of the initial £2.6bn earned from the initial 60% cut in the 2017 Budget.

“We need to back small businesses and their shareholders – not clobber them with a secret tax grab”, said Cherry.

What is the Dividend Allowance?

The Dividend Allowance is a tax-free lump sum that dividends investors can receive. It also relates to director shareholders of private companies that may pay themselves in the form of dividends as opposed to a salary.

Dividends can either be accepted as a cash lump sum or reinvested into a savings or investment account.

Prior to the 2017 Budget, the £5,000 allowance meant that any dividend income above the £5,000 threshold was taxed at 7.5% for basic rate taxpayers. Higher-rate taxpayers’ dividends would then be taxed at 32.5% and additional rate taxpayers’ dividends taxed at 38.1%.

Post-2017 Budget, director shareholders have experienced increased tax exposure, with the tax-free Dividend Allowance lowered to £2,000.

The Government itself estimates that this tax cut will affect more than two million people in the 2018-19 financial year, resulting in average losses of £315 per person.

When quizzed about the prospect of another cut to Dividend Allowance, a spokesman for the Treasury said: “We keep all taxes under review.”