Philip Hammond, Britain’s chancellor of the exchequer, has slashed the annual tax-free dividend allowance to £2,000 from £5,000 as government believes wealthy individuals are exploiting the allowance.

The reduction in allowance, which was introduced by George Osborne less than a year ago, will come into effect in April 2018.

Government believes that wealthy people exploited the allowance by creating firms and paying themselves their income as dividends.

To offset this, which will also affect hundreds of thousands of ordinary investors, Hammond raised the threshold for tax-free Isas from just over £15,000 to £20,000.

Commenting on the spring budget, Nucleus product technical manager Tracyann Kneen said: “The slash in the tax-free dividend allowance down to £2,000 is surprising – this new measure has been with us for barely a year. The cut will impact shareholder directors and investors with significant portfolios of typically more than £50,000. Using their Isa and pension allowances will become even more important."

Brown Shipley client director Rebecca Williams commented: “The Chancellor’s cuts to the tax-free dividend income threshold will impact company directors and investors who draw income through dividends. Though the Chancellor highlighted the increase in ISA and personal income tax allowances later this year to offset this, investors with substantial portfolios may do well to consider whether their investments can be structured more tax efficiently going forwards.

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“Investors may wish to consider ISA allowances and spousal arrangements, whilst those who are also company directors may wish to review their compensation strategy and the split between salary and dividends,” Williams added.

Prudential senior technical manager Graeme Robb commented: “This continues the theme of previous budgets and reinforces the government’s desire to clampdown on often complex tax avoidance strategies. These arrangements are a world away from tried and tested mainstream tax planning solutions carried out by the vast majority of advisers on behalf of their clients.”

Wealthify CEO Richard Theo criticised the chancellor’s new savings incentives.

“We welcome that the government recognises the need for inflation-beating savings solutions for average savers but this is like putting a sticking plaster on a broken bone – it’s a short-term solution to a long term issue and inadequate to alleviate the growing savings crisis,” he said.

“The limitations (3 year fixed, with a maximum of £3,000) also mean it won’t be appropriate for many savers and doesn’t help answer the question of how to stop the UK's 700 billion cash savings pot from dwindling to the tune of 8 billion per year. What will happen when inflation increases as predicted to 4 per cent – will the government release yet another savings solution?”