The tax-free dividend allowance is to be slashed from 5,000 to 2,000 from April 2018, the Chancellor has said.

Since its introduction in April 2016, the allowance which means no tax to pay on dividend payments has helped small business owners who pay themselves an income this way from their firm, as well as largely benefiting better-off investors with shares portfolios.

Now, following what Philip Hammond called "unfairness" around the tax advantage concern that many people were using it to pay less income tax, as well as it being a benefit to the already well-off the lower rate is to be introduced.

However, dividend income received on shares held in a stocks and shares ISA will still be tax-free.

What are dividends?

Dividends are a bit like interest on a savings account. If a company makes a profit, it gives some of it back to you it could be on a regular basis or as a one-off. And just as you have a personal savings allowance for interest on savings, you also have a dividends allowance each tax year currently 5,000 where dividend income you receive is tax-free.

Any dividends received above this allowance will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.

Martin Lewis
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