In his Spring Budget, chancellor Phillip Hammond unveiled a reduction to the tax free dividend from £5,000 to £2,000.
The new tax free dividend policy will be implemented from April 2018 and aims 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.
According to the chancellor, the tax changes announced today were necessary to address the “fairness” in today’s society.
“The dividend allowance has increased the tax advantage of incorporation,” he said.
“It allows each director or shareholder to take £5,000 of dividends out of their company tax free, over and above the personal allowance.
“It is also an extremely generous tax break for investors with substantial share portfolios.”
Around half of those affected by these measures are directors or shareholders of private companies, and the rest are investors in shares with holdings worth typically £50,000 outside ISAs.
Chris Bryce, chief executive of the Association of Independent Professionals and the Self Employed (IPSE), said the hardworking self-employed people in the UK may feel that the chancellor has it in for them.
“When you look at the additional support offered for business rates it appears as if the chancellor is supporting SMEs by hitting entrepreneurs and the smallest of businesses.
“Adding in the reduction in dividend tax allowance, whether you work as a sole trader or through a limited company you will be facing higher bills.”
In official Budget documentation, the Treasury revealed the reduction to the tax free dividend will be worth £5m extra to the country’s balance in 2018-19, £870m more in 2019-20, £825m more in 2020-21 and £930m more in 2021-22.
The documentation described the move as one to ensure support for investors is “more effectively targeted”, and make the total amount of income they can receive tax-free “fairer and more affordable”.
Simon Bashorun, Financial Planning Team Leader at Investec Wealth & Investment, said: “The reduction will increase the tax bill for investors who hold stocks and shares investments yielding over £2,000 per annum outside of their ISAs.
“In many cases, there will now be a need to review portfolios only recently adjusted to take into account the £5,000 dividend allowance.