MSE News: Summer Budget 2015: Dividend tax overhaul: winners and losers

Nocto

The new system does seem simpler, and could even benefit some higher rate tax payers who receive a few dividends if the £5k allowance doesn’t taper off. But, if the allowance doesn’t combine with the personal allowance then some, such as myself, could get hit quite hard (in so much as the new 7.5% tax rate would hurt - it’s not exactly draconian!).

It reduces the amount of dividends which you can receive before tax is due for a lot of people, whilst cunningly disguising it as a tax cut… Sneaky!

I can see why they made him Chancellor…;)

bowlhead99

I don't follow what you are talking about with "if the allowance doesn't combine with the personal allowance".

You get a personal allowance. They are not taking your personal allowance away from you (unless you earn £100k+, which is no different from what they have been doing the last few years).

Your dividends will now be taxed at new rates and you get a new £5k allowance instead of a tax credit. The effective rates after you have exhausted your allowances will be higher - no matter whether you are a basic, higher or additional rate taxpayer - than the effective rates used to be under the old regime.

Old rules: effective rates of 0%, 25%, 30.6%
New rules: effective rates of 7.5%, 32.5%, 38.1%

So once you've burnt through your £5k allowance, you start to pay tax at marginal rates which are higher than you would have done in the past. If you're a high rate taxpayer whose income includes £5k of divs, you'll be better off than you were before because you now pay nothing on those £5k. If you're a high rate taxpayer whose income includes £6k of divs you'll also be better off because the saving on the first £5k is better than the tax increase on the next £1k. But at some large level of income, the cost of the higher effective new tax will exceed the saving from the new allowance.

If you're an additional rate taxpayer, the tipping point where you'll be worse off is probably about £25k of divs. For a basic rate taxpayer, the tipping point is much lower than that, because you can't possibly be better off, while you will be worse off as soon as you run out of allowances.

There is no suggestion that you get this new £5k allowance as an either/or instead of your regular annual personal allowance. The 5k is not something that tapers off, but the value of a £5k allowance is diluted for taxpayers receiving large amounts of dividends because the more dividends you have, the more you are paying at the higher effective rates than before - meaning your new tax charges will gradually catch up with, and overtake, the benefit of the lump sum £5k allowance.

Nocto

bowlhead99 wrote: »

I don't follow what you are talking about with "if the allowance doesn't combine with the personal allowance".

I think you are correct.

I only put that as what I have read so far doesn’t explicitly state that the £5k tax free dividend allowance is in addition to my existing personal allowance for dividend only income. Though it seems to imply it.

I guess it could work one of three ways:

Either dividend income becomes treated separately with its own £5k allowance. (Seems a bit harsh.)

Or the allowances run alongside each other. So someone receiving dividend income would benefit from either any unused personal allowance or the new dividend allowance, whichever is higher. Giving a maximum tax free allowance of £11k. (This scenario seems unlikely to me.)

Or they combine. So, the first £11k is tax free due to the personal allowance, a further £5k is tax free as it’s dividend income, and a further £1k tax free if some income is bond interest. (Which I think will be the situation - though I’m far from certain.)


Edit: Also, I bow to your wisdom bowlhead99, as your posts imply that you have a great deal more knowledge than me on such matters…:D

I may be suffering from muddled thinking!

kidmugsy

I suppose the basic rate taxpayer who has an income of £42k-ish p.a. from earnings or pension will be better off if he suddenly came by a £5k p.a. dividend income e.g. after an inheritance, the sale of a second house, or whatever. Because otherwise he'd have become a 40% taxpayer whereas now he won't. How many people there are with incomes close to but below the higher rate threshold I have no idea. But such people can now happily win large sums on on their premium bonds without worrying that investing it will lead to their divis being hit hard.

Anyway, I suspect that £10k p.a. for a couple is reasonably comfortable for all but a few. This may substantially comfort the aforesaid few.

westy22

HL now has an article which explains things a lot more clearly than the MSE article did and also shows that BRT, HRT and ART will all pay more tax once the £5000 allowance has been exceeded.

http://www.hl.co.uk/news/articles/budget-2015-changes-to-dividend-tax-explained

colsten

Surprising that the HL article doesn't mention pensions as dividend payments in pensions will remain as exempt as they are in ISAs.

Ifts

Saw this over on Citywire: Dividend tax hike: how to avoid paying too much

redux

kidmugsy wrote: »

I'd say that the £5k p.a. allowance for dividends is good news for shareholders only to the extent that it probably means that that amount is secure until the 2020 general election. And that gives 'em five years to move their shareholdings into pensions and ISAs.

Meanwhile Osborne will be considering whether to mess about a bit more with pensions ...

Thrugelmir

redux wrote: »

Meanwhile Osborne will be considering whether to mess about a bit more with pensions ...

Bound to come at some point in the future.

gadgetmind

kidmugsy wrote: »

the sale of a second house

Presumably only if house held in limited company as otherwise this would create a capital gain.