March 27, 2017
John Kingsley asks why one Chancellor would introduce a 0% Dividend Allowance and another savagely prune it less than 12 months later…
Would it be fair to George Osborne to call the 0% Dividend Allowance (DA) a tax gimmick? After all, fairness is a theme that dominates the ongoing debate about the workings of our tax system, so we need to be even handed. Gimmick or not, Mr Osborne’s successor (a member of the same Political Party but not the same Government) acted swiftly to curtail the DA by announcing a swingeing 60% reduction (from £5K to only £2K) in his first Spring Budget.
Perhaps hard working owner-managers around the country should rejoice that the cut doesn’t take effect until 6 April 2018. Having said that, there must be a very strong temptation for Mr Hammond to get rid of the DA all together and we wouldn’t be surprised if there’s an announcement to this effect in the Autumn Statement.
So why was the DA introduced in the first place? Well, it hasn’t escaped the Treasury’s notice that the well advised owner-manager of a private company is taking his or her profits out in the form of a small salary, supplemented by dividends. Most business people are aware that dividends don’t attract National Insurance, which results in quite substantial savings for the taxpayers concerned.
Of course these “savings” represent lost revenue to the Exchequer and “something had to be done”. To cut a long story short, George Osborne decided that he would simply add 7.5% to the rates of tax charged on dividends falling in the different tax bands. In other words, we’ve now got income tax rates on dividends of 7.5%, 32.5% and 38.1% in the Basic, Higher and Additional Rate bands respectively.
Regrettably, from the twin perspectives of stability and simplicity, George couldn’t leave matters there and felt that there was a need to soften the blow for those people holding fairly substantial investment portfolios with taxable dividend streams. As a result, we ended up with a 0% Allowance for the first £5,000 of a taxpayer’s dividend income. We can only assume that George believed that those people fortunate to have bigger portfolios with more dividend income wouldn’t be too concerned about paying some tax on the excess.
It’s also clear that the recent changes to the taxation of dividends are another example of the Government not thinking about the practical implications of new measures. For example, was there any attempt made to quantify the number of people who would be drawn into the Self Assessment system as a result of having to report a small amount of taxable dividend income? If so, was this outcome simply viewed as an acceptable level of collateral damage resulting from the Government’s legitimate aim to protect the tax base? Either way it’s not a great example of joined-up thinking and the further reduction in the DA is likely to increase the number of people needing to file Tax Returns for no reason other than to report dividend income.
So, coming back full circle, we don’t think it’s fair to call the DA a gimmick. It would be more accurate to describe it as a measure driven by political expediency to limit the fallout from a targeted tax raid on the owner-managers of private companies, which form the backbone of the UK’s economy. However, if the introduction of the DA stems from political expediency, then its subsequent cut is more about financial expediency, which appears to be the greater priority for Mr Hammond. If that is right, then the DA’s days are surely numbered.