Under the new regime, those with taxable dividend income of less than £5,000 will not pay any more tax than previously. Assuming a dividend yield of 3%, this would imply that those with taxable portfolios of less than around £170,000 will see no increase in their tax liability (higher and additional rate taxpayers will even see a decrease). The position for those with more than £5,000 of dividend income will vary: basic rate payers will see their tax liability increase, but higher and additional rate taxpayers will pay less than before if their dividend income is less than £20,000-25,000 per annum.
Many small business owners use dividends to extract value from their company, and will be similarly impacted. The Chancellor explicitly stated that he hopes these changes will "reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities", and he expects a subsequent reduction in incorporation to raise an additional £500m per annum from 2019/20 onwards.
Those investors potentially affected should review their portfolios, both in terms of reassessing dividend paying investments but also a strategic review of the tax wrappers within which investments are held as these can help to offset any increased liability. Tax wrappers such as pensions, ISAs and onshore/offshore bonds will become more valuable.
Company owners should review these changes in conjunction with their tax and financial advisers as they will need to reconsider their entire strategy for extracting value from their business in a tax efficient manner.Please contact us if you would like us to assist with such reviews.