Today’s budget, Osborne’s first ‘pure’ budget, is a fascinating bundle of policy, politics and posturing. For us FIRE eaters, there is plenty to think about. But for me there is one unambiguous negative: the tax hike on dividends for those of us with sizeable investments.
Dividend taxes are notoriously difficult to understand. I find the easiest way to understand it has been to consider the Government as wanting to tax (and I mean tax – they ignore National Insurance here) people the same whether they earn money as salary or whether they incorporate as a company and then pay themselves retained profits as dividends. The system we’ve had for years has seen the Government do this as follows – taking £1000 of salary/profit as the starting point:
- Tax the company ~20% corporation tax. Leaving £800 retained profit, payable by the company as a dividend to its shareholders.
- Give shareholders a tax credit with their £800 dividend, amounting to one ninth of their dividend. This basically was a slight fudge, and said the government was treating £800 divi as being £889 paid gross, with £89 of it having already been collected as tax (even though actually £200 has been collected as tax, tut tut).
- Then tax dividends receivers at special rates (which was a quid pro quo for the slight fudge mentioned above). Basic rate taxpayers paid 10% i.e. £89 which, hey presto, it turns out they have already paid, leaving no extra tax due. Higher rate tax payers paid 32.5% on the £889, i.e. £200 extra, leaving them with £600. This is, surprise surprise, what they’d have been left with net of tax if they’d received an extra £1000 of taxable salary.
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