Change to tax free dividend income limit

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Budget 2017 saw a slash in the tax free dividend allowance from £5,000 to £2,000, effective from April 2018.

The existing dividend allowance meant there is no tax to pay on the first £5,000 of your dividend income, no matter what non-dividend income you have.

The allowance is available to anyone who has dividend income.

Tax  on dividends you receive over £5,000 are as follows:

  • 5% on dividend income within the basic rate band
  • 5% on dividend income within the higher rate band
  • 1% on dividend income within the additional rate band

The £5,000 allowance was introduced by former chancellor George Osborne in July 2015.

For an additional rate taxpayer fully using their dividend allowance, the changes announced today will cost them an extra £1,143 in tax in 18/19 compared to £1,905 in 17/18.

The change leads business owners to rethink how they are paid.

The substantial new cut to £2,000 is expected to raise £870m in 2019-20 alone with expectations of a revenue take around £900m a year as a result of the dividend change.

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