Contractors who work via their own PSC should prepare themselves for a reduction in their dividend allowance.

From next month, the dividend allowance for contractors working through their own PSC will be £3,000 less. The change is due to be introduced on 6th April this year, and will see the allowance go down from its current level of £5,000 to £2,000 per year.

Many contractors who use PSCs pay themselves a minimal salary and then withdraw all of the available dividends.

However, despite the changes to the dividend allowance, contractors may in fact take home more pay because there are also changes to personal allowances and the basic rate.

Contractors who wish to ensure that they use the most tax-efficient method to pay themselves should seek advice from a professional accountant. Despite the changes for contractors, working as an independent worker is still more beneficial than working as an employee.

In his Spring 2017 Budget speech, Chancellor of the Exchequer Philip Hammond targeted dividends, saying: “People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.”

The Chancellor said that he believed that all individuals should pay roughly the same amount of tax, whether they are directors, shareholders, employees or self-employed.

This statement led to a hike in the level of Class 4 National Insurance paid, though these hikes were later reversed. The cut in the dividend allowance is going ahead.

The dividend allowance was introduced in April 2016 as part of a shake-up in how dividends were taxed.