The Dividend Tax Credit is Dead.

So Osborne has done what I think many business owners have for years been wondering he might have done years ago. Let alone wondering why previous Chancellors hadn’t. Most business owners take advantage of the Dividend Tax Credit and the low tax rates on dividends to pay themselves in addition to a basic salary. It has often been thought of as one of the rewards for taking the risk of employing people.

Well now it is going (not sure when it is effective from). The 10% dividend tax credit will go and you will pay tax on everything above £5000, which he claims won’t affect 85% of dividend recipients. Well I’m guessing it will effect nearly all business owners, and I am sure they won’t be best pleased.

So we had a quick look to see what difference it would make, taking in to account that we are no tax experts – just interested bystanders (and recipients of dividends of course). The best summary we can find is that when the 10% dividend tax credit was taken in to account in the past, it effectively meant that no tax was payable on dividends at all for basic rate payers, and then it was effectively 25% over that (nominally a gross 32.5%, but adjusted for that tax credit). That makes is relatively simple to estimate the tax as a rough cut calculation. Under the new system, it is arguably easier to calculate – but more expensive. After your £5k allowance, you now pay 7.5%, 32.5% and 38.1% for the various bands. We tried to plot this on a graph, and it doesn’t look pretty.

I do hope that we have made a mistake in here, because if we haven’t then it effectively means the tax has gone up by somewhere between 100% and 40% depending on your dividend income. Have a look at our spreadsheet and see what we mean.

Dividend Tax Rate Changes Graph – Rough Calcs – not advice