New dividend allowance is tax rise 'by the back door'

A professional accounting body has expressed 'serious concern' that the £5,000 tax free dividend allowance is a tax rise by 'the back door'.

The Association of Taxation Technicians (ATT) says that the measure, announced in the Summer Budget, is in fact not a complete exemption to tax.

It will instead sit within the normal basic and any higher rate tax bands of the taxpayer.

Huge surprise

The ATT has warned that this is likely to come as a huge surprise to taxpayers with dividend income who had been under the impression that the allowance was significantly more generous.

This clarification was made on August 17 2015 in HMRC's Dividend Allowance factsheet.

Michael Steed, President of the ATT, said: "As this measure was announced by the Chancellor as being a tax-free allowance it is understandable that taxpayers believed the dividend allowance would operate outside of an individual's tax rate bands.

"To now discover that the allowance is in fact restricting the amount of dividends that a basic rate taxpayer can currently receive without a tax liability is a fairly big shock. It also raises questions as to the real policy intention behind this measure.

"The Chancellor announced the dividend allowance as a positive measure for taxpayers but underneath it all it now appears to be designed as a tax raising measure. Shareholders in family companies in particular may well feel that this is a tax increase by the back door.

Those who see the Income Tax Lock as fairly meaningless will feel justified in their scepticism. Although this measure is intended to come in from April 6 2016, there has been no prior consultation and draft legislation is yet to be published.

"The Dividend Allowance factsheet published on GOV.UK includes a few examples but they are of a simplistic nature and in no way address the major impact that this will have for example on company directors who receive both salary and dividends. The limited examples provided in the factsheet suggest that some basic rate taxpayers may well have to pay more tax than under the current system whilst some higher rate taxpayers may actually pay less than at present.

"We are seriously concerned that the practical implications of the proposals have not been thought through thoroughly enough. We think there is an urgent need for detailed consultation in advance of the drafting of the relevant legislation so that it can be drafted appropriately taking the feedback into account."