Beware of Chancellors bearing gifts

When is a tax allowance actually a tax increase? When it's introduced by George Osborne would be the cynical, albeit accurate answer.

From this month the new £5000 tax free band of dividend that was announced in last year's Budget comes into effect. The implication is that in tidying up the dividend rules, which have become increasingly labyrinthine over the years, the Chancellor is doing us a favour by offering a nice little tax perk. He isn't.

A brief history lesson would be useful here. Before that nasty Gordon Brown removed the ability of ISAs and pension funds to reclaim the tax credit on dividends and abolished advanced corporation tax in the late 1990s dividends were effectively exempt from any explicit tax. This was because it was generally accepted that money handed to shareholders had already been subject to corporation tax on the company's profits and to then tax it again when the dividend was paid would effectively be double taxation on the same tranche of money.

Since those halcyon days the lure of the potential income from taxing dividends has proven an irresistible lure to Chancellors of both major parties but has Osborne now reversed the trend? Sadly, the answer is a resounding no.

Fair enough, someone with a small level of dividends, perhaps from an investment portfolio, will benefit, but have a look at what happens if your dividend income exceeds £5000, given that most company directors currently take lowish salaries and top them up with dividends to reduce National Insurance costs.

In the last tax year basic rate taxpayers had an effective nil rate of tax on dividends, and the effective rates for higher rate taxpayers and super rate taxpayers were 25% and 30.56% respectively. From 6th April, after the £5000 tax free allowance, the rates will be 7.5%, 32.5% and 38.1%, and that is expected to net the Treasury an extra £6.76 billion over the remainder of this Parliamentary term.

No wonder that a spokesman for KPMG said last July "Our clients are all going to take dividends in the period before April 2016, because if they have control over the dividend flow it seems obvious that the timing is going to be important."

To paraphrase a famous phrase "Beware of Chancellors bearing gifts".

Robin Sainty APFS M.A. (Cantab)