The new dividend tax on income received from shares is set to pour an extra £9 billion into UK government coffers by 2021 – but who are the winners and losers?
The new way to tax dividend payments started on April 6, 2016.
Everyone can earn £5,000 from investing in shares tax-free – excluding shares held in pensions and ISAs which remain tax-free as well.
The old dividend tax credit disappears and a new scale of income tax takes over based on how much you are paid from dividends in the year.
Basic rate (20%) taxpayers will pay 7.5% on any dividend income over £5,000
Higher rate (40%) taxpayers will pay at 32.5% and additional rate taxpayers (45%) will have to pay at 38.1%.
Who pays the extra dividend tax?
The rates increase for all taxpayers. Under the old system, basic rate taxpayers paid no tax on dividends, while higher rate earners paid at 25% and additional rate taxpayers had 30.56% levied on their income from shares.
The government argues that 75% of investors receiving dividend payments will see no change in the amount of tax they pay – so where’s that £9 billion coming from?
Around a million taxpayers will actually pay less tax because of the change, says HM revenue and Customs (HMRC).
Anyone earning £5,000 or less from shares will pay no tax on the income.
Higher rate taxpayers would have paid £1,250 on this level of earnings from shares, while additional rate taxpayers would have had to cough up £1,528.
The taxpayers with the most to lose are higher rate investors with dividend income of £21,667 and additional rate shareholders earning £25,265 from dividends.
Sheltering share income
HMRC reckons fewer than 8,500 investors earn dividends of between £5,000 and £10,000.
For anyone expecting a large tax bill, sheltering shareholdings in an ISA or SIPP pension would remove them from the income tax net immediately.
Switching shares from a personal portfolio to an ISA or SiPP could trigger a capital gains tax bill if their value has increased by more than £11,000 – the CGT tax-free allowance for the year.
Spouses could transfer shares to each other without paying any tax and take advantage of two £11,000 allowances – one each for the year.
The process involves selling the shares and immediately buying them back.
Note that expats do not receive tax-free allowances from a UK pension or ISA.