UK Tax Technicians Criticize New Dividend Allowance

The Association of Tax Technicians (ATT) has expressed serious concern that the proposed new UK Dividend Allowance amounts to a tax rise “by the back door.”

Chancellor George Osborne’s Summer Budget provided for the replacement of the Dividend Tax Credit with a new Dividend Allowance. The allowance will be available to anyone who has dividend income. According to the Government, it will mean that the first GBP5,000 (USD7,887) of dividend income is tax-free. The allowance will apply from April 2016.

A recently published HM Revenue and Customs (HMRC) factsheet confirmed that tax will be charged at the following rates on any dividends received above the GBP5,000 allowance: 7.5 percent on dividend income within the basic rate band (up to GBP43,000, with the first GBP11,000 covered by the personal income tax allowance); 32.5 percent on dividend income within the higher rate band (GBP43,001-GBP150,000); and 38.1 percent on dividend income within the additional rate band (over GBP150,001).

The ATT said that HMRC’s clarification that the allowance will sit within an individual’s normal basic and any higher tax rate bands will come as a surprise to taxpayers who had been under the impression that the allowance was significantly more generous.

ATT President Michael Steed said: “As this measure was announced by the Chancellor as being a tax-free allowance it is understandable that taxpayers believed the dividend allowance would operate outside of an individual’s tax rate bands. To now discover that the allowance is in fact restricting the amount of dividends that a basic rate taxpayer can currently receive without a tax liability is a fairly big shock. It also raises questions as to the real policy intention behind this measure. The Chancellor announced the dividend allowance as a positive measure for taxpayers but underneath it all it now appears to be designed as a tax raising measure.”

Steed added that there has been no consultation on the measure and draft legislation is yet to be published. He said the examples included in HMRC’s factsheet are simplistic and do not address the major impact the reform will have on company directors who receive both salary and dividends. In addition, the examples “suggest that some basic rate taxpayers may well have to pay more tax than under the current system whilst some higher rate taxpayers may actually pay less than at present.”

Steed expressed the ATT’s concern that the practical implications of the proposals have not been thought through thoroughly enough. He said there is an urgent need for detailed consultation in advance of the drafting of the legislation.