The £5,000 tax-free dividend allowance was introduced in the first Budget of the new Conservative government in summer 2015. It was brought in under the umbrella of simplifying dividend taxation, as the 10 per cent tax credit was removed. The factsheet said: ‘This simpler system will mean that only those with significant dividend income will pay more tax. If you’re an investor with modest income from shares, you’ll see either a tax cut or no change in the amount of tax you owe'.
Now, less than two years later, it seems that we will have a more complex system and those with modest income from shares will see an increase in the amount of tax they owe, as the £5,000 tax-free dividend allowance will be reduced to £2,000 from 2018/19. Two years is clearly a long time in politics.
In the worst case, individuals will see their tax increase by around £1,100, assuming they pay tax at the top rate of tax and receive more than £5,000 of dividend income. For couples who may have organised their tax affairs based on the rules from 2015, this could double to £2,200 of extra tax.
However, how about more simple situations? The government has been keen to simplify the tax system as we move to Making Tax Digital. Allowances have been brought in for small amounts of interest and rental income and many have been removed from the tax system altogether to avoid a filing burden for minimal tax collection. Couples may have organised their affairs so that modest (to use the government’s 2015 wording) dividends are shared between them. Let’s assume a couple where a non-working spouse receives £5,000 of dividend income. They will now have a £225 tax liability (tax at 7.5 per cent on £3,000) to pay from 2018/19. If they have a pension (or some employment income), the extra tax can be collected through the coding notice under PAYE, assuming they know the amount of dividend they will receive and the code is correct.
If they don’t have any income taxed under PAYE, they will need to file a tax return: for £225 of extra tax, or even less if they are just over the £2,000 limit. Bearing in mind that up until 2015/16 they could have received around £40,000 of dividend income without a tax charge or filing burden, they have now been hit with a filing requirement and tax liability, and HMRC will incur a cost of administering this too.
Couples should review their split of dividend income over the course of the next year and re-organise where appropriate. However, the government should really consider whether it is practical, at the lower end, to increase the filing burden for a very small tax contribution.
For more information please get in touch with Gary Heynes, or your usual RSM contact.