Wednesday 8 March 2017 1:21 pm

Tax free dividend allowance reduced from £5,000 to £2,000 two years after George Osborne scrapped the dividend tax credit

Chancellor Philip Hammond has slashed the tax free dividend allowance from £5,000 to £2,000.

The Treasury said the allowance was being shrunk so as to "reduce the tax differential between the self-employed and employed, and those working through a company, to raise revenue to invest in public services".

It will "ensure that support for investors is more effectively targeted, and make the total amount of income they can receive tax-free fairer and more affordable", according to the Treasury.

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

Many startups and small businesses rely on dividends as a source of income, and this move will be felt keenly by a group hit elsewhere in today's Budget – Hammond also announced that self-employed workers will pay increased national insurance contributions from April next year.

The reduction of the tax-free dividend allowance takes account of the increased ISA allowance, which will rise to £20,000 from this April, as well as further increases to the tax-free personal allowance which is additional to the dividend allowance.

A £2,000 dividend allowance will continue to mean that 80 per cent of general investors pay no dividend tax, including those with sizeable investments (typically, up to £50,000), the government said.

The £5,000 allowance was first introduced less than two years ago by Hammond's predecessor, George Osborne

In his July 2015 Budget, Osborne scrapped the dividend tax credit, and brought in an allowance instead.

At the time, Osborne said this would mean 85 per cent of investors would see a reduction in the amount of dividend tax they pay, while investors with a portfolio of more than around £140,000 would see an increase.

LIVE: Chancellor Philip Hammond delivers the 2017 Budget