Chancellor Philip Hammond has announced he will reduce the dividend allowance from £5,000 to £2,000.
In his Budget speech today Hammond said the dividend allowance, introduced by his predecessor George Osborne, represented an “extremely generous tax break.”
The Chancellor said the move would come into effect in April 2018.
Helm Godfrey chairman Danby Bloch said: “The first £5,000 of dividends an individual receives is taxed at nil.
“The £5,000 is called an “allowance” but this is misleading. It is not an allowance; it is just a nil rate band. In particular, for example, the £5,000 still counts towards the higher rate threshold.
“The good news for wealthier clients is they get this £5,000 allowance or nil rate band in the same way as non-taxpayers and basic rate taxpayers. So this is a tax cut for them for modest amounts of dividend income.”
Prudential head of technical Les Cameron says: “The previous dividend allowance of £5,000 allowed investors to hold around £150,000 of equity-based portfolios tax free. Today’s announcement of a reduction of this allowance to £2,000 will slash the size of the portfolio that can be held tax efficiently by over 50 per cent. As a result we expect to see an increase in the use of tax-efficient wrappers such as Isas, pensions and investment bonds as investors seek to mitigate their increased tax exposure.”