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

It’s a Budget – But Not As We Know It

The Chancellor, Philip Hammond, delivered his Spring budget yesterday. But as most of the big changes have been moved to the Autumn, this was a “steady as you go” statement in essence.

However there were some significant changes for private investors. The biggest is that the tax free allowance on dividends has been reduced from £5,000 to £2,000. So if you rely on dividend income, say in retirement, this will cost you substantially more – over £1,000 extra in tax in some cases if you pay higher rates of income tax.

The Chancellor seems to have decided to attack the growing number of “self employed” and those who are paying themselves via limited companies. Hence the change to dividend income. Hence also Class 2 and Class 4 National Insurance being raised but the impact of other changes are actually quite complex. Irrespective the Chancellor has decided that the current high differentiation between taxes (and benefits) between employed and self-employed “undermines the fairness of the tax system” even though the latter get fewer benefits. One surely cannot argue with that although he has been accused of breaking a Conservative manifesto promise not to raise taxes.

There are of course some simple steps to avoid higher taxes on dividends. If you don’t need the cash for spending money, then move your high dividend paying investments into an ISA or SIPP. The ISA allowance will increase to £20,000 from April this year as previously announced so enabling you to shelter substantial amounts from the taxman, particularly if you are married and hence can put in twice as much. In addition you might consider investing in Venture Capital Trusts (VCTs) where dividends are tax free. These have become more popular of late because of the limits on pension contributions and the recognition that they have generated good returns in recent years from the best companies, although the availability of new subscriptions to them is now low.

The Chancellor has taken some steps to increase productivity in the UK which is a hot Government theme at present – see the last ShareSoc Informer Newsletter for more discussion on that. So there is money for research into hot technology areas, investment in 5G networks, improvements to the road network (£690m), and £500m to improve technical training (for “T-Levels”).

How is the economy doing generally? Economic growth is now good after the failure of the Brexit decision to dent it as expected. But the Government is still planning to run a deficit so overall Government debt will still rise this year to a new record of over £1.6 trillion. Indeed with some attacks on tax avoidance, overall tax raised will rise under this budget to the highest proportion of GDP since the 1980s. Will this prove a drag on the UK economy and businesses in general? We have yet to see. The Government is also considering how it can raise taxes on on-line retailers who often avoid business rates and will try to close a loophole whereby sales are made VAT-free by being made from overseas.

Thinking of moving overseas for your retirement? The Chancellor is imposing a tax charge of 25% on pension transfers to qualifying schemes (Qrops) from the new tax year with some exceptions. This is to try and frustrate the move of pensions to more favourable tax regimes which has apparently been subject to abuse of late.

But as rather expected, the Government is making a lot of money from pensions being cashed in under the new freedoms to do so devised by former Chancellor George Osborne. The latest estimate has doubled to £1.6 billion!

Or considering what to do after your time as Chancellor ends? Just take note that former Mr Osborne is going to be earning £650,000 per year as an advisor to Blackrock for working four days per month. It was disclosed in the register of MPs interests on budget day.

Roger Lawson