11 Mar 2017

Spring Budget 2017: The tax raid nobody is talking about

Spring Budget 2017: The tax raid nobody is talking about

Businesses owners who pay themselves in dividends on top of a small salary will be hit by a change announced in the Budget, it has emerged.

Public anger is growing as the financial impact becomes clear of the controversial move in the Budget to slash the tax-free dividend allowance for business owners and investors.

Chancellor Philip Hammond initially faced most criticism on Wednesday from his announcement that a higher rate of National Insurance is planned for the self-employed. 

It has been estimated that National Insurance increase, which has been criticised by one small-business organisation as "squeezing the go-getters" in Scotland,  will raise £145million a year for the Treasury by 2021-22.

Almost slipping under the radar was the news that the dividend allowance will be reduced from £5,000 to £2,000 from April 2018.

Who is affected?

This will affect company owners who pay themselves in the form of dividends rather than salary. The move also hits investors with portfolios of shares held outside ISAs or pensions.

The announcement did not generate much headlines for a start, but that changed after it was calculated that the dividend allowance cut was the biggest tax-raiser in the Budget, bringing in £2.6billion to the Government over five years.

Financial experts have now accused Mr Hammond of stealth tax changes, and have compared last Wednesday's announcements to Labour removing tax relief on dividends paid into workplace pensions in 1997. That has been widely recognised as the first step in the destruction of final-salary pensions.

This week's Budget tax moves have been branded as an "unnecessary assault on entrepreneurship".

The cut in dividend allowance will particularly hit those using shares for retirement income, and will also reduce the incentive to invest into shares outside an efficient tax wrapper such as an ISA or Pension.

Although the Chancellor said the measure was mainly designed to reduce incentives for workers to incorporate themselves as companies for tax reasons, it will also impact on savers with investments in stocks and shares worth more than £50,000 outside ISAs.

The Treasury has said savers make up around half of the 2.2 million people affected by the dividend allowance change, who will lose an average of around £320 a year each.

Analysis

Neil Aspinall, an independent financial adviser with Aberdein Considine, said the dividend allowance cut could have far-reaching implications.

“This might turn out to be the biggest story of the Budget, but it seemed to have gone under the radar, at least initially,” he said.

“This will affect all those with limited companies and large share portfolios.

“By 2021-22, this will take £930million out of the pockets of investors, company directors and shareholders.

“For some, these changes may mean money is better invested elsewhere, so the best advice is probably to seek a financial review with your adviser.”

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