The chancellor’s decision to cut the dividend allowance has been criticised for sending out a confusing message, as many investors will be forced to rethink their portfolios yet again in light of the new rule.
As part of his Spring Budget, Philip Hammond revealed that he would reduce the tax-free cap for dividends by 60 per cent as he looks to create a fairer tax regime.
The new rule means that from April next year any dividend income above £2,000, outside of an Isa, will now be subject to income tax.
The decision has come as a surprise to the financial industry, particularly as the dividend allowance had only been introduced by Mr Hammond’s predecessor George Osborne last year.
Lisa Caplan, head of financial advice at Nutmeg, said: “You don’t need a massive portfolio to have a dividend income of over £2,000 - only around £50,000."
She therefore said the cut to the dividend allowance will increase the importance of Isas as an investment vehicle.
The measure will also undoubtedly attract criticism from those who believe it breaches the government's pledge not to boost personal taxes Jon GreerJon Greer, expert at Old Mutual Wealth, said the surprise dividend allowance cut will be very unwelcome for business owners and investors, effectively shrinking the tax-free amount that can be taken from their business by 60 per cent.
“The measure will also undoubtedly prove controversial and attract criticism from those who believe it breaches the government's pledge not to boost personal taxes.”
Simon Bashorun, who heads up the financial planning team at Investec Wealth & Investment, said: “The government has for some time looked to address perceived inequalities in the income tax regime and adapt it to the changing ways in which people earn a living.”
He said today’s announcement will serve as another blow to investors as they face bigger tax bills when drawing dividends from a limited company.
“In many cases, there will now be a need to review portfolios only recently adjusted to take into account the £5,000 dividend allowance,” he said.
Tracyann Kneen, product technical manager at platform Nucleus, said: “The tax-free dividend allowance was only introduced in 2016, and has now been more than halved.
“This sends out a confused message to those trying to save for their futures,” she said, arguing it doesn't help with setting a long-term plan and could even hit confidence in markets.
The chancellor said the reduction in the allowance would prevent the incorporation of small businesses.
But Graham Morgan, a tax partner at chartered accountancy firm Kingston Smith, said: “In many cases the decision to incorporate is commercially driven, with the tax advantage being a secondary feature.”
He said the drop in the allowance will cost up to £1,143 for each individual, and argued it was therefore unlikely to change the behaviour of entrepreneurs.
Mike Gordon, technical director at financial planning firm Rutherford Wilkinson, said the reduction was unexpected, particularly bearing in mind the allowance was only introduced in this tax year.
Ben Yearsley, investment director at the Wealth Club, said the new allowance will hit investors hard, adding the “only upside” is that Mr Hammond confirmed the increase in the Isa allowance for next month.
katherine.denham@ft.com
