Contractors’ Questions: How much will halving the dividend allowance cost my limited company?

Contractor’s Question: While this high level look at the contractor dividend allowance halving is interesting, is there any further information or advice about getting just £500 in tax-free dividends (after the personal allowance is used up), from April 6th 2024? How much will 50% less dividend allowance cost the average PSC contractor, for example?   

Expert’s Answer: From April 6th 2024, the dividend allowance (the amount charged at a nil tax rate) will be halved to £500.

The dividend allowance has been consistently reduced by the government since 2017, from £5,000 to £2,000 in 2018, to £1,000 in 2023, and now to £500 from 06.04.24. This direction of travel is worth bearing in mind ahead of Spring Budget 2024.

Remember, taxable dividend income excludes dividend income from assets held in ISAs, which will continue to be entirely tax-free.

Chancellor Jeremy Hunt’s £500 cut in the dividend allowance will increase each contractor’s tax bill by a minimum of 8.75% at the basic rate.

Another £43 you'll pay to HMRC...

Unfortunately (or fortunately if you’re HMRC), this reduction in the dividend allowance will result in an additional £43.75 tax per annum, per shareholder.

The government has forecasted that this move will raise an additional £450 million for the exchequer.

This additional £450million will help fix the public finances but HMRC will need to make changes to its IT systems to deliver this change in dividend taxation. Currently, that system-change is estimated to cost in the region of £700,000. 

Taxing times worthy of negotiation

Alongside a potential increase in your bill from HMRC for corporation tax (the rate of which was potentially hiked for your PSC from 19% to up to 25% since April 6th 2023), the reduction in tax-free dividends may make it challenging for contractors to see an increase in their profits. That is; unless their daily rates can uplift to cover the additional tax burden.

This is a key negotiation I expect many contractors will have in the coming weeks and months.

Speak to your accountant too

Lastly, if you have not yet utilised your £1,000 dividend allowance (2023-24), please speak to your accountant and ensure you have distributed your tax-free dividend by April 5th 2024.

To reiterate, from the new financial year, your tax-free dividend will be just £500 so, at the very least, consider topping up your savings by £43.75 to budget for the additional tax due to HMRC, which will be payable by January 31st 2026.

The expert was Teodora Dimitrova of Chart Accountancy.