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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