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#SummerBudget: Government hits dividends as it continues clamp down on avoidance

THE TAX ADVANTAGE in taking payment as a dividend is to be wiped out for many as the chancellor announced that the tax credit applied to dividends is to be replaced with a £5,000 allowance from April 2016.

Alongside the move, tax rates on dividend income will be increased to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

The “simpler” system will mean that only those with significant dividend income will pay more tax. Investors with modest income from shares will see either a tax cut or no change in the amount of tax they owe, the chancellor claimed in his Budget address.

The move means taxpayers will be potentially able to earn £17,000 a year tax-free.

Many in recent years have used personal service companies to pay themselves national minimum wage and made up the difference in a dividend.

BKL Tax partner Geraint Jones said: “This will hit owners of personal service companies particularly hard as they generally remunerate themselves primarily via dividends.”

MHA MacIntyre Hudson tax partner Alastair Kendrick added: “A lot of individuals will have to look at how they are structured. Many people have been advised by advisers to take this route since IR35 came in in 1999, so I expect the desire for personal service companies to diminish.”

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