During his Summer Budget speech, George Osborne set out the thinking behind a new dividend tax credit that reduces the amount of tax paid on income from shares.
The government was unable to continue with its crusade to cut corporation tax rates below 18% while there are such strong tax incentives for people to self-incorporate, he explained.
“The dividend tax system was designed partly to offset double taxation on profits. But the system has not changed despite sharp reductions in corporation tax. Lower rates are creating rapidly growing opportunities for tax planning.”
To alter that equation, he set out plans to reform the taxation of dividends by replacing the current lower tax rates applicable to dividend income with a new £5,000 tax-free dividend allowance for all taxpayers, accompanied by increased tax rates on dividend income.
The rates of dividend tax will be set at 7.5%, 32.5% and 38.1%, equivalent to an increase of 7.5% where dividend income exceeds £5,000.
According to the Chancellor, “Those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax; 85% of those who receive dividends will see no change or be better off.”
Almost immediately after the Chancellor sat down, AccountingWEB members were scratching their heads. “What are people’s views on the new 7.5% dividend tax?,” asked darrellwilliams in Any Answers. “Sounds like really bad news for most of the companies who I act for, as well as holders of quoted companies.”
Detail was hard to find, but bobbuilderlink pointed to page 44 of the Budget Report, which explained: “These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500m a year from 2019.”
We need to crunch numbers commented AccountingWEB member youngloch...
About John Stokdyk
AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.