The new allowance limit will take effect from April 2018.
“This will reduce the tax difference between the self-employed and those working through a company”, said the Treasury on its website.
Typically, general investors will need over £50,000 worth of stocks and shares outside an Individual ssavings account (Isa) to be affected, it added.
The move comes as a surprise given that the £5,000 allowance only came into force in April last year, designed to replace the notional 10% tax credit on dividends, which was abolished by former chancellor George Osborne in the 2015 Budget.
At the time, Osborne said this would mean 85% of investors would see a reduction in the amount of dividend tax they pay, while investors with a portfolio of more than around £140,000 would see an increase.
Mike Gordon, technical director of financial planning firm Rutherford Wilkinson, said: “The reduction in the £5,000 tax free dividend allowance to come into effect in April 2018 was a bit unexpected with the allowance only introduced in this tax year.
“For a higher rate tax payer, it would make up to £975 of difference in the amount of tax paid on dividends over the allowance. For a basic rate tax payer, it would be up to £225.”
Jon Greer, pensions expert at Old Mutual Wealth reducing the tax-free dividend allowance from £5,000 to £2,000 for 2018 will impact people who have direct holdings over £50,000.
“With the Isa allowance increase to £20,000, people would be wise to maximise Isa contributions if they aren’t already doing so,” he warned.
Falls by the sword
Tom Selby, senior analyst at AJ Bell said: “The annual dividend allowance has been put to the sword by Philip Hammond less than a year after his predecessor George Osborne introduced it. The cut from £5,000 to £2,000 in April 2018 will make it even more important that investors make full use of the tax allowances available through Isas and self-invested personal pension (Sipp).
“In particular investors will need to think carefully about which investments they hold inside and outside of tax wrappers. They will want to ensure that high dividend paying investments are held within Isas and Sipps to minimise the impact of the dividend allowance cut.”
