Cut to tax-free dividend allowance to be shelved... for now

The lower limit on tax-free dividends was announced in the Budget last month. It followed what Chancellor Philip Hammond called "unfairness" around the tax advantage.

Since its introduction in April 2016, the £5,000 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, plus investors with large shares portfolios.

However, it's now been confirmed the proposals have been taken out of the Finance Bill, which the Government has stripped back in order to get it through ahead of the snap general election on 8 June. Yet they could yet reappear after the election.

Tom McPhail, head of policy at investment firm Hargreaves Lansdown, says: "Investors would be wise not to assume this is a permanent reprieve. We suggest they continue to assume that by the end of this tax year, they may have to work within the reduced allowance."

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.