Budget 2017: The tax-free dividend allowance has been cut from £5,000 to £2,000 - this is what it means for you

Caitlin Morrison
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The tax-free dividend allowance has been cut (Source: Getty)

Chancellor Philip Hammond announced today that the tax free dividend allowance is being cut from £5,000 to £2,000.

Hammond said he was taking action to reduce the tax differential between the self-employed and employed - but what does it mean for the UK?

Lower "salaries"

Many self-employed people provide their services through companies, paying themselves dividends instead of salaries, so this will have an impact on income for several households - who will also be hit by Hammond's national insurance contributions hike.

PwC said the allowance squeeze could increase the cost of withdrawing profits from a business by over £1,000 from next April.

For a higher rate tax payer, it would make up to £975 of difference in the amount of tax paid on dividends over the allowance, according to Mike Gordon at Rutherford Wilkinson.

For a basic rate tax payer, Gordon said, the difference in tax paid would be up to £225.

Double for couples

"These figures potentially double up where both husband and wife hold shares in the company," he added.

"On other changes, it is understandable there should be no difference in tax paid between the self-employed and employed."

British Chambers of Commerce (BCC) warned that although short-term support for firms hardest-hit by business rates rises will be welcomed, entrepreneurs would be unhappy with today's proposal.

Mixed signals

"While businesspeople appreciate a steady hand on the tiller, the government is sending mixed signals by holding investment largely steady at precisely the time that it is exhorting British businesses to double down," said the BCC's Dr Adam Marshall.

"More needs to be done in the coming months to improve infrastructure and encourage lagging business investment to ensure the UK is Brexit-ready.”

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