Confusion over tax on dividends

Slightly concerned, but being a dutiful neighbour, I left my half-finished pint and headed down the road. What he wanted to talk about was – yes, you’ve guessed it – tax. Spread over his kitchen table were printouts from the Revenue’s website, a few books on personal finance, a calculator and lots of sums.

He is a single pensioner with little income, but who will shortly have some money to invest. He was very embarrassed about asking my help, but he had spent most of the day trying to sort out his finances and had come badly unstuck trying to understand how dividends were taxed. As a former engineer, used to dealing with arithmetical problems, he was horrified that he’d failed.

I tried to explain the basic rules for taxing dividends, running through what the tax credit actually was (the book suggested it was 20%, but the Revenue material said 10%), how the tax treatment worked and that it was not repayable.

The longer I talked, the more I realised he was none the wiser and how hard it was to explain – for example, that although the dividend comes with only a 10% rate credit, that fully satisfies the basic rate liability.

I left his house downcast, sad that my intelligent neighbour had wasted so much time and effort trying to understand how dividends were taxed. I find it shameful that the UK tax system has been made so complex that even highly numerate people struggle to understand it. I would not mind if this was an obscure area or we were dealing with large sums of money. We are talking small beer, albeit crucial to the financial position of my neighbour. It’s no wonder he poured scorn on the UK tax system, which has lost contact with ordinary people going about their business.

  • Frank Haskew is a senior consultant of the ICAEW’s tax faculty

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