A tax expert has criticised HM Revenue and Customs’s statement on how investors will have to pay dividend allowance, stating that the new allowance is less generous for those at the tax band margins than was initially hoped.
In the summer Budget, chancellor George Osborne announced changes to the dividend allowance which mean individuals will not have to pay tax on the first £5,000 of dividend income, no matter what non-dividend income they have. From April 2016 the dividend tax credit will be scrapped and replaced with a £5,000 tax-free allowance.
Yesterday (17 August), HMRC published a factsheet, listing a number of examples of the way the allowance will work in different situations and reiterated how investors will pay tax on any dividends they receive in excess of £5,000 at the following rates:
• 7.5 per cent on dividend income within the basic rate band;
• 32.5 per cent on dividend income within the higher rate band; and
• 38.1 per cent on dividend income within the additional rate band.
Andrew Hubbard, tax partner at Baker Tilly, told FTAdviser the examples set out by the tax office show the new allowance is less generous for those at the tax band margins than was initially hoped.
For example, HMRC stated that for those with a non-dividend income of £40,000, who receive dividends of £9,000 outside of an Isa, £11,000 of the non-dividend income is covered by the personal allowance, leaving £29,000 to be taxed at basic rate.
This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The dividend allowance covers this £3,000 first, leaving £2,000 of allowance to use in the higher rate band.
All of this £5,000 dividend income is therefore covered by the allowance and is not subject to tax, with the remaining £4,000 of dividends all taxed at the higher rate of 32.5 per cent.
The factsheet clarified that the allowance is available to anyone who has dividend income, however the tax office failed to reveal how the new rules will interact with the likes of gift aid or pension contributions.
HMRC stated dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Isa will continue to be tax-free. It added that the dividend allowance will not reduce investor’s total income for tax purposes.
Dividends within the allowance will still count towards an investor’s basic or higher rate bands, and may therefore affect the rate of tax that they pay on dividends they receive in excess of the £5,000 allowance.
Mr Hubbard added it was important to remember that what has been put out by HMRC was just a factsheet and not the final rules. “It is not a substitute for legislation. There are still unanswered questions.”