Impact of the dividend allowance cut for retail investors

9 March 2017
  • £435 billion* is invested outside of tax efficient products in the UK

  • The annual Dividend allowance will reduce from £5,000 to £2,000 in April 2018

  • Affects dividend paying shares and funds held outside of ISAs or SIPPs

  • Based on a 4% dividend yield (FTSE All Share is yielding around 3.8%)

          - Portfolios under £50,000 will not be affected

          - Portfolios of £75,000 will pay up to £381 more tax per year

          - Portfolios of £125,000 or more will pay up to £1,143 more per year

How much more investors will pay in dividend tax each year post April 2018.  Based on 4% dividend yield:

Portfolio size


or less




or more

Dividend income


or less




or more

Basic rate tax (7.5%)





Higher rate tax (32.5%)





Additional rate tax (38.1%)





Source: AJ Bell.  For illustration purposes only - the exact amount an investor pays will depend on their individual level of income.

Tom Selby, senior analyst at AJ Bell, comments:

“The Chancellor threw investors a curve ball in the Budget by drastically cutting the amount they can receive in dividends each year before paying tax.  Investors who hold investments within tax advantaged ISAs or pensions don’t need to worry but those that have funds or shares outside of those products need to work out how it might impact them.

“The first step for anyone who might be affected is to make sure they are putting as much as they can in ISAs and pensions, which next tax year is £20,000 for ISAs and up to £40,000 for pensions.  Not only that but it makes sense to ensure that their higher dividend paying investments are moved into these products before investments that are more focused on capital growth.  This will ensure they can minimise the cut to the dividend allowance as much as possible.” 

*KPMG Market Themes study 2016

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