Budget tax changes – set for a comeback

The Spring Budget contained a few surprises, but came before the big surprise – a snap election.

Mr Hammond’s first and last March Budget was a relatively low-key affair which almost disappeared once the general election was announced and most of its proposals were shelved. However, some measures are still worth bearing in mind.

Dividend allowance and business structures

The £5,000 dividend allowance, introduced in 2016/17, was accompanied by an increase of 7.5% tax rates on dividends above the allowance. This was to claw back revenue from small businesses owners who sidestep national insurance contributions (NICs) by operating through companies.

In March Mr Hammond said the dividend allowance would be cut to £2,000 from 2018/19, but in the frenetic end of parliament period the necessary legislation was dropped. A proposal to raise more money from sole traders and partnerships by adding 1% to class 4 NICs in both 2018/19 and 2019/20 was withdrawn after backbench opposition.

The dividend allowance cut, which is expected to be reinstated, was aimed at shareholder directors but it has wider ramifications. Far more ordinary investors would find themselves paying tax on their dividends with the allowance at only £2,000. If you had thought stocks and shares ISAs were becoming a waste of time, the potentially lowered dividend allowance (and new £20,000 ISA contribution limit) should prompt a re-think.

Higher rate income tax threshold

Mr Hammond confirmed the goal of a £50,000 higher rate income tax threshold by 2020/21, and left untouched existing legislation raising the threshold for 2017/18 to £45,000 (other than for certain income in Scotland).

This £2,000 increase may not be as significant as it seems, because the upper limit for class 1 employee and class 4 NICs has also risen by £2,000. So a saving of £400 in tax could be offset by a near £200 NICs increase.

As with the likely dividend allowance change, the higher rate threshold is a reason to revisit the opportunities presented by independent taxation if you are married or in a civil partnership.

The Financial Conduct Authority does not regulate tax advice. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.

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