Dividend taxation - the devil's (not) in the detail

16 July 2015

Andrew Hubbard and Stephen Hay

One of the biggest surprises in the Budget was the reform of dividend taxation. But much of the detail has still to be confirmed - no explanatory note was published on Budget day, and the legislation wasn’t included in the Finance Bill. It will be included in next year's Finance Bill - even though it will apply from 6 April 2016, before the Bill receives Royal Assent - so was the decision to introduce the reform another last-minute one?

The winners here will be higher-rate individuals with dividend income of less than £5,000 as those dividends will be tax-free. Losers will be everybody with dividend income in excess of £5,000. Among those will be many family company owners who draw out profits as dividends rather than salary, so a married couple owning a company 50-50 can currently draw out something in the order of £30,000 each without paying any tax, but next year they’ll face a 7.5 per cent tax charge. This is no accident. The government wants to discourage small business owners 'paying' themselves in dividends rather than salary - this change being one of the ‘rebalancing exercises’ from the Budget.

A couple of issues here - the first being administration. The £5,000 limit is undoubtedly a deregulatory measure intended to remove the admin burden for the taxpayer and HMRC, but there’s a potential additional burden for basic rate taxpayers receiving dividends over £5,000. Many won’t currently receive a tax return, but will now need to return details of these dividends, and we assume this will be clarified in the new digital tax accounts.

The second is the Scottish element. We can’t imagine how the Scottish Government will react from 6 April when the dividend reform is introduced at the same time as the new Scotland Bill should be in place to implement the Smith Commission proposals and the implementation of the Scottish Rate of Income Tax (SRIT). The reason why is simple. Taxation of savings and dividend income hasn’t been devolved to Scotland and remains reserved to the UK Parliament. Consequently, none of this tax finds its way to the Scottish Government. Particularly given that a new source of tax now payable by basic rate taxpayers will increase the tax on dividend income significantly, it would suggest that the Scottish Parliament may seek to have this particular tax devolved as part of the ongoing negotiations with the UK Parliament.

The implications of fiscal devolution are starting to bite.