The Treasury disclosed in July how the dividend tax credit will be substituted with a tax-free allowance of 5k of dividend income for every taxpayer, this comes into force from April next year. The Chancellor said the move will “simplify dividend taxation”. But could this be the beginning of increased taxation of dividends?  Smaller companies will most likely have to review the way they remunerate directors, but will the necessity for these reviews rise in years to come?

Baker Tilley examined any possible future changes and stated that there may be ‘uncomfortable knock-on effects – particularly for high-earners’ as result of these changes. They continued to state that:

“The Chancellor clearly wishes to eliminate the tax advantages presently enjoyed by people operating their small firms via a company – these alterations won’t totally remove those advantages, however I would anticipate that during the coming years dividend tax would be increased until it begins to cost more to operate via a company. The dividend alterations are going to have a detrimental impact on the family companies who’ve historically taken profits via dividends. Next year they’ll most likely face a tax rise. This is not an accident.”

The Government has fixed the dividend tax levels at 7.5% for standard rate tax payers, 32.5% for all higher rate tax payers and 38.1% for all additional rate taxpayers but there’ll be no tax credit. This means a rise of 7.5% when dividend income is greater than £5k.

Before, people in receipt of dividends took advantage of a 10% tax credit that for standard rate taxpayers meant they were able to receive their dividend free of tax. Higher rate taxpayers paid just 25%.

Representatives at HMRC stated within an update the £5,000 tax-free allowance will continue to be included when determining someone’s entire income for tax.

The report said:

“The dividend allowance won’t lower your total income for tax calculations. However, you won’t have tax to pay on the first 5k of dividend income you have. Dividends within the allowance still count towards the standard or higher rate thresholds, and could therefore impact on the rate of tax which you pay on the dividends you get over and above the 5k.”