In April 2016, the Dividend Tax Credit was replaced with a £5,000 dividend allowance. At the same time the rate of tax on dividends was increased to 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate).
With effect from 6 April 2018, the dividend allowance will reduce to £2,000. There are no planned changes to the rates of tax that apply to dividends in excess of £2,000.
The reduction in the allowance is aimed at director shareholders and is intended to reduce the attractiveness of operating through a company. The change will need to be factored into shareholders’ income extraction plans.