Cut been passed. Dividend AllowanceThe dividend allowance is a

Cut to Dividend
Allowance: Is it going to affect you? In the government’s second finance
bill that was confirmed last month, dividend allowance will be cut by £3,000 from
its current level at £5,000.Contractors could be worse off by
£1,143 as the Chancellor continues to raid down the contracting sector.Phillip Hamood first spoke about
the dividend cut in the Spring Budget speech where he said, “People should have
choices about how they work, but those choices must not be driven primarily by
differences in tax treatment”.The Chancellor believes that tax
treatment must be the same for both employees and non-employees. There has
however been a backlash from contracting organisation who say that employees
enjoy a lot more benefits than non-employees. As the dividend allowance cut did
not appear in the first Finance Bill immediately after the general election,
people were of the opinion that it might be scrapped along with Class 4 (self-employed)
National insurance contributions increase. However, this dividend policy did
re-appear in a subsequent bill and has been passed. Dividend AllowanceThe dividend allowance is a
fairly new introduction to the tax system. It was introduced in the year 2016
and it implies that dividends are subject to tax in line with what the
individual earns.There are three dividend tax
rates, with basic rate tax payers paying dividend tax at 7.5%, higher and
additional rate tax payers paying 32.5% and 38.1% respectively.Like personal allowance, there is
a “dividend allowance” of £5,000. It meant that the first £5,000 of dividend
income is not taxed for limited company shareholders getting paid in dividends.
However, this sum is still taken into consideration for overall tax purposes. Starting April 2018, this dividend
allowance will fall to £2000. Is it going to affect you? If yes, how much?Your overall income (savings,
dividend and non-dividend income) will determine how much tax you pay on the
dividends you get in 2018 with the allowance reduced from £5,000 to £2,000. The
dividend tax will primarily depend on which tax band the first £5,000 falls in.
For a basic rate tax payer, this
reduction would lead to an increase in dividend tax by £225. Higher rate and additional
rate tax payers would be worse off by £975 and £ 1,143 respectively. If the dividends (£5000) fall
between two tax bands, then the above figures will change.  Conclusion: The dividend policy changes could particularly affect
family businesses where multiple family members take dividend payments. These
people could be far worse off.