The current system of tax credits on dividends was designed over forty years ago when corporation tax was more than 50 per cent and the total tax bill on dividends for some was more than 80 per cent. Since then, tax rates including corporation tax have fallen, leaving the existing Dividend Tax Credit as an outdated and complex feature of the tax system, creating strong incentives for people to self-incorporate and pay the lower rates of tax due on dividends. This needed to be addressed.
From April 2016, the new dividend tax will replace the existing dividend tax credit, and I am pleased that everyone will be able to earn £5,000 in dividend income tax-free. Beyond this limit, the rates have been set lower than income tax rates, as 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for additional rate taxpayers.
While many ordinary people will pay less, richer people will end up paying more. As well as addressing the issue of tax planning I outlined above, those with larger shareholdings, typically above £140,000, will pay more. Overall, these reforms seem to me to be good news for the majority of people, and I am very pleased to see the Chancellor introduce them. All-in-all, these reforms will see 85 per cent of those who receive dividends either better off or unchanged, with over a million people seeing their tax cut.
By Patrick McLoughlin on October 12, 2015