UK Dividend Taxation: 2017 Budget Hike

The owners of small businesses in the UK are to bear the brunt of the efforts made in the 2017 Budget to reduce the UK’s deficit.

Following the introduction of a dividend allowance of £5,000 by his predecessor – with a tax charge on dividends that exceed this amount of at least 7.5% of the excess – Chancellor Hammond has reduced the allowance to £2,000 from the start of the 2018/19 tax year.

Many commentators are noting that this action is likely to affect those receiving dividend income by increasing their income tax bill by £225, this being the reduction of £3,000 x 7.5% (the rate of income tax payable by those whose total income does not cause them to be higher rate tax payers).

However, we would like to look back a couple of years, before the dividend allowance was introduced.

A typical scenario of the time might have seen a director/share holder receiving a dividend of (say) £20,000.

With a salary of £10,000 there would have been no additional tax to pay, as the total income was insufficient to generate a higher rate tax liability – ie there was no additional tax payable.

Assuming that same taxpayer now has a salary equal to the personal income tax allowance, the tax payable on the dividend income from 2018/19 will be £18,000 (ie £20,000, less the dividend allowance of £2,000) x 7.5%, or £1,350.

Alternatively, with a salary equal to the personal allowance, and income of £32,000 received by way of a dividend:

  • The first £2k will be free of tax
  • The next £30k will be taxable at 7.5%, giving tax payable of £2,250.

It should also be remembered that the company paying the dividend has already paid corporation tax before the dividend is declared – no longer do we have an imputation system in the UK whereby the dividend is accompanied by a franking credit representing the tax already paid by the company.

Remuneration strategies for those running a business through a limited company should be kept under review – contact GM Expat Tax to discuss your options, particularly if a departure from the UK is under consideration.