Summer Budget 2015: Osborne raids investors' dividends
Chancellor George Osborne will reform the way that UK investors' dividends are taxed, with high earners to pay more.
George Osborne announced in his Summer Budget that the current dividend tax credit system will be replaced by a tax-free dividend allowance of £5,000.
It means all dividends earned outside of pensions and Isas will be tax free up to £5,000, then taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
The new allowance means that the 15% of investors who receive significant dividend income on shareholdings worth £140,000 plus (or business owners who pay themselves a large amount through dividends) will pay more.
However, Osborne claims that those with smaller shareholdings – around 85% or over a million investors – will see their dividend taxes cut as a result of the reform.
Osborne says: "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.
"We have inherited a very complex and archaic system. So I am undertaking a major and long overdue reform to simplify the taxation of dividends."
Osborne claimed that the new dividend allowance, in conjunction with the Personal Savings Allowance announced in the spring Budget, means savers will now be able to receive up to £17,000 in income a year tax free.
Commenting on the change, Patricia Mock, personal tax expert at Deloitte, said it the dividend allowance would do little to simplify the current system.
"For the average taxpayer, to have a £5,000 exemption is great, but most basic rate taxpayers didn't have any liability anyway on their dividend income so it's not really clear what it is achieving. It sounds to me like it's going to add complexity to an already complex system.
"It's difficult at first sight to see how what is being proposed makes it simpler, although it's certainly raising money."
The Chancellor estimates that dividend tax reform should bring in £500 million to the Treasury by 2019/20, adding to a raft of measures designed to tackle evasion and capture £7.2 billion in extra taxes.
This article was written for our sister website Money Observer
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.