Double Taxation and Broken Promises

The most recent changes to dividend taxation in the Chancellors Spring Budget are a major attack on private investors. The simple change to reduce the Dividend Tax Allowance from £5,000 to £2,000 only a year after it was introduced will have a big impact on the tax paid by many investors. It’s also another example of a broken promise about “no increases in taxes” made in the Conservative manifesto.

The Chancellor, Philip Hammond, has already had to back-track on the increases to National Insurance over the broken promise. Perhaps he should reconsider the above changes also.

Let’s go back eighteen months when his predecessor George Osborne issued his last budget. That scrapped the dividend tax credit system and introduced the Dividend Tax Allowance. This is what I said at the time about that:

“Dividend tax change. Few people understand the dividend tax credit system so this might be seen as a worthwhile simplification, but it will increase the Government’s tax take, particularly from wealthy investors, very substantially. For example it is forecast to raise over a billion pounds per year in tax!

The original reason for dividend tax credits was to avoid double taxation on the same profits. When both corporation tax and personal tax rates were high, profits made by a company could effectively be taxed twice – once within the company by corporation tax and then when the profits were distributed in dividends. It could result in very high combined rates. But tax rates are now lower, particularly corporation tax.

The new £5,000 allowance will mean the vast majority of individuals who receive dividends will not be adversely affected. However, those with substantial dividend income will be. For example, someone who receives £50,000 a year in dividend income may be £3,800 per year worse off!”

The latest reduction in the Dividend Tax Allowance to £2,000 will mean some investors are now an additional £1,000 worse off than stated above.

What did the Conservatives say in the 2015 Manifesto (which you can read here: https://www.conservatives.com/manifesto)? It says on page 27 that “A Conservative Government will not increase the rates of VAT, Income Tax or National Insurance in the next Parliament”. Most people will have read that to mean that they will not be paying more Income Tax or National Insurance. Hence the complaints from the self-employed concerning changes to the latter. But the impact of these changes to dividend taxes are even more damaging to those living on dividend income in retirement.

Obviously the way we are headed is for the Dividend Tax Allowance to be scrapped altogether and dividend income is clearly now a target for more tax raising from the Chancellor.

I would urge all private investors to complain to their Members of Parliament about this change. You can write to your M.P. by post or email. You can obtain their contact details from this web page: http://parliament.uk  (enter your post code at the bottom left). This will take you to a page giving their name, postal address and email address – an email will do fine.

Roger Lawson

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5 thoughts on “Double Taxation and Broken Promises

  1. What is odd about the Government’s manoeuvring is the refusal to take the taxes which are available without increase. For example, National Insurance contributions are not paid by over 65s.

    There is no logical reason for this tax to be paid only by young people.

    But then the membeship of the Conservative party is heavily biased towards the elderly.

    So the young self-employed are, the Chancellor doutless thought, an easy target.

    Robert Morfee

  2. Just for the record, I would like to state that I disagree with this stance (though my view may not be popular). As I see it, this change will only affect a small minority of investors, with substantial portfolios outside of the generous ISA and SIPP tax shelters. And, for those investors, the tax increase will not be a huge proportion of their income.

    The government needs to narrow the budget deficit and this seems to me to be one of the less egregious ways of doing so.

    Mark Bentley

  3. Thought they would increase the allowance inline with CGT; which is £11k ish.

    More favourable treatment of capital gains seems iniquitous

    • Yes it’s also irrational as any idiot can turn income into capital gains, or vice versa. Was it not my namesake who tried to harmonise the taxes but since then they have drifted apart again due to “ad-hocery”, to coin a new word, by uneducated chancellors. There seem to me more concerns about the appearance of tax changes rather than the underlying substance. Roger Lawson.

  4. Pingback: Finance Bill and Tax Changes | ShareSoc Blog

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