The government has denied that its reforms to dividend taxation are a ‘stealth' hike.
Currently, those receiving dividends benefit from a 10% tax credit. Given the tax on dividends for basic rate taxpayers (those paying 20% income tax) is 10%, it means basic rate taxpayers receive dividend income tax-free. The tax credit meanwhile brings the 32.5% notional charge on dividend income for higher rate tax payers (those paying 40% income tax) down to 25%. The tax on dividend income for additional rate taxpayers (those paying 45% income tax) falls to 30.6%.
Under a new system announced in the Summer Budget, which will be implemented in April 2016, everyone who receives dividend income will not pay tax on the first £5,000. Basic rate taxpayers will pay 7.5% tax on any additional dividend income, higher rate taxpayers will pay 32.5% and additional rate taxpayers 38.1%.
The change will affect many advisers and other small business owners, who, instead of paying themselves entirely through a salary, pay themselves either in part or entirely through dividends.
Many advisers have said they would change or at least reconsider how they pay themselves and how their business is structured as a result of the upcoming changes.
There has been criticisms over the new regime that it is an effective increase on income for those paying themselves through dividends despite the fact that chancellor George Osborne promised before the election that the headline rates of income tax, VAT and national insurance would not increase.
A petition asking the government to reconsider the dividend tax changes has received 27,651 signatures. If it reaches 100,000 signatures the issue will be considered for debate in parliament. The petition was started by Serena Humphrey, a small business consultant.
But when asked by New Model Adviser® whether the Treasury would admit the policy was a 'stealth tax,' exchequer secretary and East Hampshire MP Damian Hinds said that it was not.
'I don't think the changes in dividend credits can be described as a stealth tax because it's fairly obvious and straightforward what is happening,' he said.
'Basically people [were] paying themselves in dividends rather than in salary because it's tax advantageous. There is a difference between salary and dividend: one is a payment for labour and one is a recompense for risk and that's the reason there's a difference between the two rents.'
'What we are doing with this change is making sure that retail investors can continue to get that dividend income, but it kind of removes one particular adverse incentive in the system.'