Your dividend allowance came a step closer to being cut today: Here's why

Emma Haslett
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The dividend allowance will be cut from April 2018 under the proposals (Source: Getty)

Entrepreneurs, beware: the government came a step closer to cutting the dividend allowance by more than half today, after it published its second Finance Bill.

The bill contains measures aimed at cracking down on tax avoidance, with a move to abolish non-dom status and a reduction of the so-called Money Purchase Annual Allowance.

The bill means the dividend allowance will be cut from £5,000 to just £2,000 in April 2018, which the government said will "limit" the difference in tax paid by employees and those who run their own businesses.

Today's Finance Bill also includes a measure to abolish non-dom status, a measure announced in the 2016 Budget, which will mean any non-dom taxpayer resident in the UK for 15 or more out of the last 20 years will be deemed domiciled for income tax, capital gains and inheritance tax purposes.

Finally, the bill wll reduce the Money Purchase Annual Allowance from £10,000 to £4,000, closing a loophole which allows people to recycle their pension savings to get extra tax relief.

"The UK is a world leader in tackling tax avoidance and evasion, but we must continue to take action to ensure everyone pays their fair share," said Mel Stride, financial secretary to the Treasury and Paymaster General.

"The Finance Bill will allow us to do just that by preventing companies and individuals from using complicated tax structures to avoid paying the tax they owe, and penalising people that help them to do it."

"This second Bill does at long last bring much needed clarity to what was fast-becoming a tax vacuum," added James Hender, head of private wealth at Saffery Champness.

“More than half of the new provisions will be backdated, and this will bring welcome certainty to many – particularly non-domiciled individuals who had the rug pulled out from under them when the first bill was drastically shortened. Many taxpayers will end up paying more tax under the new rules, but at least they now have a clear blueprint of the new tax architecture."

“The government has confirmed plans to reduce the tax-free allowance on dividends in April 2018. Taxpayers affected by this change should review whether they can advance dividends into the current tax year to make the most of the £5,000 allowance whilst it lasts."

The bill is due for its second reading in the House of Commons on Tuesday.

Read more: What the tax-free dividend allowance cut means for you

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