HMRC sets out detail to dividend taxation changes

HM REVENUE & CUSTOMS has published a factsheet illustrating the overhaul of the way dividends are to be taxed from 2016.

The move, announced in July’s Summer Budget, wipes out the tax advantage of taking payment as a dividend. The tax credit applied to dividends is to be replaced with a £5,000 allowance, available to anyone with a dividend income, irrespective of their other earnings.

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.

Critics claim the switch provides a disincentive to those taking the risk to start up and run their own business.

“We all know the extra risk, sweat, tears and sacrifice that comes with running your own business and for that there has to be some differential. Tax is one way currently that this can be achieved. Close that gap and the reward for the risk becomes less,” wrote The Practitioner following the Budget.

The government, though, claims the new system will be simpler and help clamp down on tax avoidance activity.

The factsheet contains illustrative examples and explanatory notes for taxpayers.

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