Budget  

Dividend allowance cut to boost pensions demand

Dividend allowance cut to boost pensions demand

Chancellor Philip Hammond's decision to slash the dividend allowance from £5,000 to £2,000 will push more people into tax efficient wrappers such as Isas and pensions, a Prudential spokesperson has said.

Mr Hammond made the announcement in his first budget as chancellor. 

He said around half of those affected by the measure were director-shareholders of private companies.

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He pointed out, though, that the decision did not impact Isa savers, saying the £4,760 increase in the annual ISA allowance, to £20,000, as well as the further increases in the personal allowance to £11,500, would go ahead as planned.

Les Cameron, head of technical at Prudential, said the government's decision to cut the divident allowance would increase demand for tax-efficient savings wrappers such as Isas and pensions.

"The previous dividend allowance of £5,000 allowed investors to hold around £150,000 of equity-based portfolios tax free," he said. 

"Today’s announcement of a reduction of this allowance to £2,000 will slash the size of the portfolio that can be held tax efficiently by over 50 per cent.

"As a result we expect to see an increase in the use of tax-efficient wrappers such as Isas, pensions and investment bonds as investors seek to mitigate their increased tax exposure."

In his budget speech, Mr Hammond said the dividend allowance had "increased the tax advantage of incorporation".

"It allows each director/shareholder to take £5,000 of dividends out of their company tax free, over and above the personal allowance," he said, adding it was "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 to fund the measures I shall announce today, by reducing the tax-free dividend allowance from £5,000 to £2,000 with effect from April 2018."

He said around half the people affected by this measure would be director-shareholders of private companies.

The rest were investors in shares with holdings worth over £50,000 outside Isas.

"And of course everyone will benefit from the generous £4,760 increase in the annual ISA allowance, to £20,000, and the further increase in the personal allowance to £11,500 from April," he said.

james.fernyhough@ft.com