Budget: Share dividend allowance slashed to £2k a year from 2018

Investors will see their annual tax-free dividend allowance cut to £2,000 from £5,000 from April 2018 in a move that is set to see the government receive almost £1bn in extra revenues by 2021/22, said Chancellor Philip Hammond.

Delivering his Spring Budget, Hammond took an axe to a measure that only came into force less than a year ago and introduced by his predecessor George Osborne, sacked by Prime Minister Theresa May last year.

Hammond said the current system was unfair, with most of the beneficiaries of the allowance company directors. The rest were investors with shareholdings of £50,000 or more.

"It is also an extremely generous tax break for investors with substantial share portfolios. I have decided, therefore, to address the unfairness around director/shareholders’ tax advantage, and at the same time raise some much needed-revenue," Hammond said.

"Individuals and households who receive dividend income in excess of £2,000 will be affected. Around two thirds of all those with dividend income, will be unaffected by this measure. It is estimated that this will affect around 2.27m individuals in 2018 to 2019 with an average loss of around £315, the Treasury said in its policy paper.

Treasury estimates said the move would produce £5m in revenue in 2018/19, then £870m , £825m and £930m in subsequent years.

"This measure will ensure that support for investors is more effectively targeted and that the total amount of income they can receive tax-free is fairer and more affordable, in light of increases to the tax-free personal allowance and the Individual Savings Accounts allowance (ISA). It will also partially reduce the tax difference between the self-employed and those working through a company," the Treasury added.

Iain McCluskey, tax partner at PwC, called the move "somewhat of a kick in the teeth to his predecessor".

"The cut will disappoint those who crave a simpler tax system, and will mean a tax rise for those who receive dividend income, and may pull some back into self assessment. Taxpayers should look to maximise using ISAs for their investments, given the now very generous ISA limits."

Chris Sanger, head of tax at EY, said Osborne's original intention when he announced the measure in his Summer Budget in 2015 was to apply it "those who either pay themselves in dividends or have large shareholdings worth typically over £140,000" so they pay more tax.

“The Chancellor cut this to just £2,000, meaning that those who have just more than £50,000 in shares will now be caught up by a tax rise that is ostensibly targeted at owner managers," Sanger said.

“The cut in allowance will mean that a higher rate taxpayer receiving £5,000 of dividend income will now face almost £1,000 in extra tax. This will be a bitter blow for those who are relying on these savings to fund their retirement but who now find themselves as ‘collateral damage’.”