Reduction of Dividend Allowance?

masonic wrote: »

They will be able to earn £2000 of dividends tax free. Before the original change they paid tax on all of their unwrapped dividend income. Only those with a very large dividend income (>£26.7k) will be worse off owing to the slightly higher rate of tax in force now.

A number I've seen posting I disagree with this is my understanding how share dividend taxes used to be. So you need to work through my examples to tell me where I'm going wrong....

I'm a little distrusting of the things presented in budgets and like to run through by own figures to see the effects. Guess I just struggle with maths and tax, so please point out the mistakes.

There is no >£26.7k I can't see how you got to this £26.7k figure, do expand I just can't see it.

Before in April 2014/15 tax year.

£90 was paid out as a share dividend. There was an artificial tax credit of £10 to make the dividend payment look like £100 with 10% tax deducted. Only Higher rate only would pay extra tax, non tax payers and basic rate tax payers would still receive the full £90 just the tax man pretends you received £10 more.

Only if close to the borderline the fictitious 10% added could push someone into the higher tax band. That's getting to complex, so assuming not being pushed between tax bands.

So £10k of dividends for a basic rate tax payer, is £10k. With no actual tax deducted just a fictitious 10% added and then deducted. You still get £10k but takes up £11,111,11 of your tax band.

In this tax year.

The same £90 is paid out. For basic rate tax payers, once £5000 is reached they pay 7.5% in tax or £6.75 result in not £90 as before but £83.25.

On £10k of share dividends as non-tax payer, or all would be below the personal allowance so £10k is received. For basic rate tax payers the first £5000 is free of any additional tax, the next £5000 is taxed at the additional 7.5%, which is £375. That means instead of the £10k received in previous tax years, basic rate tax payers only receives £9625.

From April 2018 that same £10k, will have £600 in tax deducted as they go over the £2000 allowance, so will receive £9400.

When the tax credit system was scrapped, it's wasn't scrapping any actual tax on non-tax payer or basic rate tax payers. Share dividends where only ever taxed extra for higher rate tax payers, unless you count the fact that share dividends are paid out of company profits so have had corporation tax deducted.

From April 2018 onwards any basic rate tax payer receiving more than £2000 of share dividends or basic rate tax payer currently receiving more than £5000 of share dividends is worse off than in the tax years up to 2015/16. The first 10% tax credit was just an imaginary tax not an actual tax

Before

Where
N = Nett after tax
D = Dividend payments
I = Nett from tax income excluding dividends.
d = Dividend with 10% tax credit
t = tax credit

d = D + t
D = d - t

N = D + I is the same as
replacing D with fictitious d - t
N = d - t + I

You can pretend D = £1 and t was £100000 of tax credit then d could be £100001 makes no difference to the N in my pocket, unless considering the higher rate tax bands where d + I is used.

Now current tax year
Nc = D + I if D<= £5000
Nc = D + I - (D-5000) x 7.5% if D > £5000

Nc = N - (D -5000) x 7.5
so
Nc < N if D > £5000


After 2018
Na = D + I if D<= £2000
Na = D + I - (D-2000) x 7.5% if D > £2000
Na = N - (D-2000) x 7.5%

so have

Na < Nc < N if D > £5000
Na < Nc = N if D > £2000 and D <= £5000
Na = Nc = N if D <= £2000

There is no £26.7k, £5000 and above or £2000 and above seem to be worse off for basic rate tax payers.

I have approx 50K in FTSE 350 companies which earn about 2.5K per year and about 15K in VCTs. While a basic rate taxpayer, serious thrift means my wages and income from other sources (including share dividends) will likely ensure I get close to maxing out my ISA this year. So the new rule means I'll have to reduce my FTSE 350 holdings over the next year or so and invest in a few more secondhand VCTs, buy stocks with lower dividends and perhaps use more of my virtually untouched CGT allowance instead.

I was wondering about buying shares in the odd REIT though; would the dividend from a company such as (for example) British Land count towards the 2K dividend allowance?

GooeyBlob wrote: »

I have approx 50K in FTSE 350 companies which earn about 2.5K per year and about 15K in VCTs. While a basic rate taxpayer, serious thrift means my wages and income from other sources (including share dividends) will likely ensure I get close to maxing out my ISA this year. So the new rule means I'll have to reduce my FTSE 350 holdings over the next year or so and invest in a few more secondhand VCTs, buy stocks with lower dividends and perhaps use more of my virtually untouched CGT allowance instead.

Presumably you've already picked the investments that will serve you best. Is paying 7.5% tax on a small fraction of your dividend income so abhorrent that you'll buy inferior investments to avoid it?

GooeyBlob wrote: »

I have approx 50K in FTSE 350 companies which earn about 2.5K per year and about 15K in VCTs. While a basic rate taxpayer, serious thrift means my wages and income from other sources (including share dividends) will likely ensure I get close to maxing out my ISA this year.

So as of April you can put £20k of shares inside an ISA again. Move the ones that pay the highest income and you'll be back below the £2k limit as you'd then only have £30k remaining outside. Repeat next year and you'll be down to £10k plus any new investments.

Economic wrote: »

The solution would be to raise the rate of corporation tax and bring back the dividend tax credit thereby reducing the incentive to use limited companies to avoid income tax and avoiding double taxation.

Unfortunately politicians prefer many smaller taxes rather than fewer bigger ones, so people don't realize how much they all add up to.
I think it was Sir Geoffrey Howe that came up with the wheeze of reducing income tax and replacing it with stealth taxes, others have just continued with it - like Osborne's Insurance Premium Tax