What is Dividend Allowance?
A dividend allowance is the amount of money you can receive from your investments as a dividend income without having to pay any tax on it. It was announced in April 2023 that the dividend allowance would decrease from £2000 to £1000 for the 2023/2024 financial year. This is one of the most significant changes in UK taxation history, leaving investors and limited company shareholders asking: "How will this affect my business?"
Understanding the implications of the change in dividend allowance is important for business owners and limited company shareholders as it could significantly reduce their income. In order to understand how the new tax-free dividend allowance affects you, there are a few things that need to be taken into consideration first.
What are the Dividend Tax Rates for 2023?
The dividend tax rates for 2023 are:
- 0% on the first £1000 of dividend income
- 7.5% from £1001 - £37,500
- 32.5% from 37,501 and over
What Are the Changes to Dividend Allowance?
The change to the dividend allowance for 2023/2024 means that you can only receive up to £1000 of your investment income as a tax-free dividend. If you receive more than £1000 in dividend income, then you will have to pay tax on the excess amount at the applicable rate. This means that if you receive £2000 in dividend income, you will only be able to claim the first £1000 as tax-free and will have to pay tax on the other £1000 at 7.5%.
What are the Implications of the Change?
The implications of this change vary from person to person, but some key points are:
- Those who have dividend income over £1000 will be hit with lower returns due to higher taxation rates
- Dividend allowance is no longer a tax-efficient way of maintaining personal wealth
- Companies may choose to pay salaries or bonuses instead of dividends in order to avoid the higher tax rates
- Investors may have to rethink their strategies in order to minimise the tax bill
Conclusion
The decreased dividend allowance for 2023/2024 is a significant change that will affect many people. It's important for investors and limited company shareholders to understand how this new rate will affect their income and adjust their strategies accordingly. By doing so, they can ensure that the new dividend allowance does not negatively impact their financial goals.
This article has provided an overview of the new tax-free dividend allowance for 2023/2024 and its implications for investors and limited company shareholders. Understanding this change is essential for business owners and investors
