Dividend rules change to hit 700,000 taxpayers
About 700,000 taxpayers are likely to face tax rises as a result of George Osborne’s “major and long overdue reform” of dividend taxation that is set to raise £2.5bn next year, the Financial Times reports.
It will push up the tax bills of top-rate taxpayers receiving more than £25,250 in dividends a year, the Institute for Fiscal Studies, an independent think-tank said on Thursday.
The changes will have a similar effect to reinstating the 50p rate, according to Alex Henderson, tax partner at PwC.
He said entrepreneurs and other 45p taxpayers would see their tax rate on dividends increase by nearly 20 per cent to 38.1 per cent, on top of the 20 per cent of corporate tax paid by the company. “There are going to be some big losers as a result of this change,” he said.
The changes — a 7.5 percentage point rate rise offset by the introduction of a new £5,000 allowance — will leave 85 per cent of those who receive dividends unaffected or better off, the Treasury said. It said the changes would result in a tax cut for more than 1m people.
It will increase the bills of a 40p taxpayer who receives more than £21,667 of dividends a year and a basic rate taxpayer receiving more than £5,000 of dividends, according to the Institute for Fiscal Studies. In 2012-13, 4.6m taxpayers received £45bn of taxable dividends.
The Treasury has estimated that the higher tax rates will deter some taxpayers from saving heavily in shares and generating profits and dividends, costing the exchequer an estimated £1bn.
The overhaul of the way dividends are taxed marked the demise of a system introduced in the early 1970s to relieve the impact of double taxation by giving a credit for the tax paid by the company.
Michael Devereux, director of the Oxford University Centre for Business Taxation, said the changes did not amount to a structural change and were instead “a minor adjustment to dividend taxation”. Nonetheless the new rules are a small but potentially significant move in the direction of taxing shareholders rather than companies.
Mr Osborne said the changes were necessary because lower corporate tax rates “were creating rapidly growing opportunities for tax planning”. Many sole traders extract their earnings from a company in the form of dividends that are not subject to national insurance contributions.
Judith Freedman, an Oxford law professor, described the changes as “quite clever” because the extra tax paid by a basic rate taxpayer owning their own microbusiness would be a crude equivalent to paying national insurance contributions. But the new system would not solve all the tax problems relating to small companies.
She predicted the measure would spark an outcry from affected businesses but said they had been “unfairly subsidised in the past”. There were better, more direct ways, to support growing businesses, she said.
Announcing the measure, Mr Osborne said that taken together with the personal allowance and the new savings allowance for bank interest, people would be able to receive up to £17,000 a year tax free on top of ISAs from April.
Stuart Adam of the IFS said that — together with the capital gains tax allowance — a taxpayer could receive £28,000 a year free of tax, raising the question of why the Treasury was favouring people who received money in a variety of forms.
