The dividend tax arrives with a vengeance
3rd August 2017
Sometimes, it doesn’t matter how often you are told something, you only ‘get it’ it when it becomes real rather than abstract.
In July 2015, George Osborne announced that from April 2016, there would be a new tax called ‘dividend tax’. As is traditional with Chancellors of the Exchequer when introducing new taxes, it was justified as a ‘simplification’ of the tax system. Also, he implied that it would only affect rich investors, by stating that 85% of people receiving dividends would be unaffected - and he emphasised how his proposed drop in Corporation Tax to 19% was good news for business. And he got away with it.
Nobody questioned why he was effectively increasing income tax by 6% on a third of British businesses – an apparent breach of the 2015 election commitment not to Increase Tax, National Insurance or VAT, because the general public, the average MP and the average political journalist did not understand what he was talking about. If British employees had faced an income tax increase of 6%, it would have been on the front page of every newspaper and leading the 10 o’clock news – but a similar increase on British businesses barely got a mention. In contrast, in March 2017, when Philip Hammond tried to raise the rate of National Insurance on sole traders by 1%, he was jumped on by his fellow MP’s and forced to backtrack – and yet this was an extremely minor change in comparison to the dividend tax.
We are now in the midst of ‘tax return’ season and letting our clients know their January 2018 tax bills - and reality is biting. Many clients will have to pay thousands of pounds more in tax then they anticipated or budgeted for. In particular, many basic rate taxpayers (including spouses of director/owners) who have never previously made Income Tax Payments, are having to pay 18 months’ worth of tax in January 2018 (the 2016/17 tax bill plus a Payment On Account towards 2017/18)..
E.g. a taxpayer with earned income of salary of £11,000 and dividends of £32,000, in 2016/17, will have tax to pay in January 2018 of £3,037 (after having nothing to pay in previous years). For higher earners, the impact is even greater.
Despite our attempts to warn our clients since July 2015, there is nothing like seeing the figures in black and white to bring the point home! I suspect that the same might apply to those MP’s and media commentators with businesses ‘on the side’ who failed to realise the implications of Osborne’s Budget back in 2015.