Business owners and shareholders can breathe a sigh of relief for now, as plans to slash the tax-free dividend allowance have been dropped from this year's Finance Bill.

The reduction in tax-free dividends was announced in the Chancellor’s Spring Budget, following what he described as an unfair tax advantage for shareholders.

Introduced in April 2016, the £5,000 dividend tax allowance has helped small business owners who pay themselves an income in the form of dividends. However, critics of the scheme point out that it has also helped investors with large share portfolios.

Under the current scheme, dividends up to £5,000 are free of tax. Earnings above that threshold are taxed at 7.5 per cent for basic-rate taxpayers, 32.5 per cent for higher-rate taxpayers, and 38.1 per cent for additional-rate taxpayers.

In justifying the proposal, the Chancellor argued that the director-shareholders, and wealthy savers with share portfolios in excess £50,000 are the greatest beneficiaries of the scheme.

Now in a bid to push through the Finance Bill ahead of the snap general election on 8 June, the proposed change to the dividend allowance has been dropped.

Should the changes have gone ahead the Government estimated that it would have affected nearly 2.3 million people with an average loss of £315 per year. With a general election looming, alienating such a large number of potential voters would not have gone down well. Still, should the Conservatives win the general election (as they are predicted to do), expect the proposal to be reintroduced during the next Parliament.

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