Dividends are a method of withdrawing profits from a business used by owners, directors and shareholders, and have long been seen as the most tax-effective method. However, over the last few UK Budgets the respective Chancellor has been eroding their effectiveness.
Firstly in the emergency Summer Budget of 2015, the then Chancellor, George Osborne, announced changes to the way dividends were taxed. Gone was the 10 percent tax credit. The tax credit that essentially made dividends under the higher rate threshold tax-free. In came a tax-free dividend allowance and three rates of tax, 7.5%, 32.5% and 38.1% (mapped to each income tax band).
The next erosion came in the 2017 Spring Budget the dividend tax-free allowance was reduced from £5,000 to £2,000.
Now it is mooted that in the 2018 Autumn Budget being delivered at the end of this month, current Chancellor Philip Hammond intends to remove the dividend tax-free allowance altogether. This would mean that from April 2019 all dividend income is subject to three bands of tax (after the normal tax-free allowance is accounted for).
The reason for the tax raid is due to the increase pressure on spending by PM Theresa May's pledge to increase the budget of the NHS - leaving the Chancellor number crunching to makes the sums add up.
The FSB (Federation of Small Businesses) has estimated the Treasury would receive a additional tax take of over £1 billion over 3 years.