Business

Who'll be winners and losers in latest taxation changes?

Chancellor of the Exchequer George Osborne
Chancellor of the Exchequer George Osborne Chancellor of the Exchequer George Osborne

QUESTION: Last month's Summer Budget announced substantial changes to how dividends are to be taxed in the UK. These changes will come into effect next April. How will the new rules affect taxpayers in receipt of dividends?

ANSWER: For all that Chancellor George Osborne presented on July 8, the overhaul of the taxation of dividends is expected to be one of the biggest revenue-raisers in the first Conservative budget in 18 years.

According to the Institute of Fiscal Studies, the government expects to raise £6.8 billion over the next five years by replacing the dividend tax credit with a tax-free dividend allowance of £5,000, with higher taxes on income above that.

Currently, those receiving dividends benefit from a 10 per cent tax credit. So for basic rate taxpayers, for example, the 10 per cent tax credit means the 10 per cent tax levied on dividend payments is reduced to zero. It is a notional credit: basic rate taxpayers don't pay the 10 per cent tax and then receive a refund, they just don't pay tax.

This notional credit mean the current tax rates on dividends are effectively:

• zero for those paying the 20 per cent basic rate of income tax;

• 25 per cent for those paying the 40 per cent higher rate of income tax and

• 30.6 per cent for those paying the additional 45 per cent rate.

Under the new system, from April 2016, all those who receive dividends won't pay tax on the first £5,000. After that, they will be taxed at the following rates:

• 7.5 per cent for basic rate taxpayers;

• 32.5 per cent for higher rate taxpayers;

• 38.1 per cent for additional rate taxpayers.

There aren't any winners from the measures among basic rate taxpayers, who will either pay the same amount of tax – none – or more under the new rules. The calculation is pretty simple: if you receive more than £5,000 in dividends in a year outside pensions and ISAs, and you've already used up your personal allowance, you'll pay more tax.

With higher rate taxpayers, it gets more complicated. Within this group, some will pay less tax under the new system than the old.

Any higher rate taxpayer earning less than £5,000 a year from dividends is an obvious winner, as they will pay no tax on that income under the new system, whereas they would have paid 25 per cent previously. So someone earning £5,000 exactly will save £1,250.

Some of those earning above this will also benefit. Higher rate taxpayers can receive nearly £21,667 in dividend payments each year before they start paying more tax in the current system than under the old.

For a small group of additional rate taxpayers, the savings could be greater. Those among this group can receive £25,250 in dividend income before they start paying more tax under the new regime. For an additional rate taxpayer earning exactly £5,000 in dividend income, they make a saving of £1,530.

As stated at the start, the Treasury expects to raise £6.8 billion over the next five years through this measure. Taken as a whole, it represents a tax hike, and taxpayers of varying degrees of wealth – basic, higher and additional rate taxpayers – will all be affected.

:: Paddy Harty (p.harty@pkffpm.com) is director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.