The surprise clampdown on the use of dividend tax credits and introduction of a £5,000 dividend tax allowance in the Summer Budget will force business owners to reconsider their tax arrangements and could reduce the number of business incorporations, warns Bill Dodwell, head of tax policy at Deloitte
On 1 June, financial secretary David Gauke MP told a tax policy conference that there couldn’t be any further reductions in the corporation tax rate without dealing with structural issues – and no doubt his audience took that as an indication nothing would happen. The Treasury and HMRC were, however, already working on ideas which the Chancellor would unveil in his Summer Budget.
The new approach to taxing dividends will commence from April 2016 – although it will not be legislated until Finance Act 2016. The dividend tax credit will disappear, to be replaced by a new dividend tax allowance of £5,000 a year.
The new rates of tax on dividend income above the allowance will be set at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. This is the most significant increase in the Red Book – with a forecast yield of £8.6bn during the life of the parliament.
