The Treasury is reportedly considering abolishing the dividend allowance in Autumn Budget 2018.
The Daily Telegraph claims Chancellor Philip Hammond has business owners, directors and shareholders in his sights to help fund a Government pledge to increase spending on the NHS.
Hammond cut the dividend allowance from £5,000 to £2,000 in Spring Statement 2017, with the move taking effect from 6 April 2018.
The first £2,000 taken in dividends in 2018/19 is tax-free, with anything above this threshold being taxed according to the individual’s rate of income tax.
Business owners, directors and shareholders use the dividend allowance to extract profits from their business, but recent changes have reduced this strategy’s tax-efficiency.
The speculation prompted a backlash from the Federation of Small Businesses (FSB), which estimates removing the dividend allowance would raise £1.3 billion by 2022.
Mike Cherry, chairman of the FSB, said:
“Removal of the dividend allowance would be most keenly felt by small business owners on lower incomes.
“By whittling away the incentives to become a shareholder in small UK firms, you’re pushing investors towards taking their money and expertise elsewhere. That’s the opposite of what we’re trying to achieve.
“We need to back small businesses and their shareholders – not clobber them with a secret tax grab.”
The Office for Tax Simplification suggested that the dividend allowance should become a dividend exemption to improve financial literacy among savers.
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