In his first budget, Philip Hammond has announced plans to reduce the tax-free directors’ and shareholders’ dividend allowance from £5,000 to £2,000.

The new regime will come into force in April 2018 and is set to be a blow to small business owners. It means a basic rate tax payer who receives £5,000 in dividends will have to pay an extra £225 tax from April 2018, and a higher rate tax payer will pay an extra £975.

This change will mainly affect savers with larger investments, and small business owners who take income from their businesses as dividends.

How will this change affect my portfolio?
From April 2018, investors should be aware that any dividend income over £2,000 will be taxed at the following rates:

• 7.5% for basic rate taxpayers;
• 32.5% for higher rate taxpayers; and
• 38.1% for additional rate taxpayers

With the reduction in the dividend allowance coming into force next year, it’s time to think about how to make the most effective use of the tax allowances and exemptions that are available to you.

With the ISA allowance set to increase from £15,240 to £20,000 in April and the new Lifetime ISA (LISA) launching, now would be the ideal time to consider using the more generous tax-free ISA allowance to optimise tax efficiency.

The reduction in the dividend allowance also brings to the fore the importance of using other tax-efficient wrappers, such as pension allowances and investment bonds, to mitigate the increased tax exposure that’s coming this way.

Get in touch to find out more about our range of financial planning services
For more information about how the reduction in the dividend allowance will affect you or for a review of your own personal financial circumstances, please call Springfield Financial Services on 01772 729742 or complete our online enquiry form.