During the Chancellors Budget Speech, Mr Osborne set out his thinking behind a new dividend tax credit that reduces the amount of paid tax on income from shares.
The Government was unable to press on with its mission to cut corporation tax rates anywhere below the discussed 18%. With such strong tax incentives for people to self-incorporate, it was unwise, George Osborne explained.
“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.”
To alter that equation, Osborne sets out plans to reform taxation of dividends by substituting the current rate of lower stature applied to dividend income with a new £5,000 tax-free dividend allowance for all tax payers, accompanied by increased tax rates on dividend income.
Dividends Tax Rates
The rates of dividend tax will be set at 7.5%, 32.5% and 38.1%, equivalent to an increase, where dividend income exceeds £5000, of 7.5%.
According to Mr Osborne, “Those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax; 85% of those who receive dividends will see no change or be better off.”
This has resulted in many accountants and financial experts sifting the information to piece the dots together. Some say it sounds like really bad news, as detail is incredibly difficult to find. However, what can be deduced is that these changes will begin to reduce the incentive to incorporate and remunerate through dividends rather than through wages, reducing tax liabilities. This will cut the price paid by the Exchequer of future TMI (tax motivated incorporation) by £500,000,000 per anum from 2019 onwards.
We will post back with the results of what we find after our team scrutinise the Chancellors information.