New taxes on the rich? There are too many for me to count
There are so many new taxes on the rich, it's easy to miss one, says Merryn Somerset Webb. But anyone who pays themselves with dividends should take note.
In my editor's letter this week, I wrote about the huge rise in the tax burden on the rich over the last decade. They've seen the top income tax rate move to 47%. They've lost their personal allowances. They've lost their right to child benefit. They've had their pension savings capped by the horrible Life Time Allowance and the fall in the annual pension allowance (which is now going down to £10,000 for those earning £210,000).
They've seen stamp duty charges on their houses soar, and if they are a non-dom, they've been hit with the fast-rising remittance change on cash they bring into the UK. And there is more to come all non-dom tax advantages are soon to be removed, and in a move that will end up affecting a couple of hundred thousand people, tax relief on the interest part of buy-to-let mortgages is about to be slashed. There's been a lot of complaint in the media that the rich aren't being hit up for the deficit in the same way as the poor. But it isn't really so.
However, several people wrote in to point out that even my long list of taxes on the well-off was not complete. I had missed out the new dividend tax. From April 2016, the notional 10% tax credit on dividends will be abolished. This is the good news it was a statistical nonsense anyway. The bad news is that after a £5,000 tax-free allowance, there will now be some new tax rates. Lower-rate taxpayers will pay another 7.5% on dividend income. Higher-rate taxpayers will pay another 32.5%, and additional rate payers will have to come up with 38.1%.
There are some good worked examples here,but the upshot is simple: some will save a little tax (higher-rate taxpayers with a dividend income under £5,000), but an awful lot of tax bills are going rise hugely. That's particularly the case for those who are currently avoiding income tax and national insurance (NI) by paying themselves in dividends via companies (it is very common for people to set up companies to pay themselves a salary just big enough to ensure they qualify for the state pension, and then to take the rest of their income in low-tax dividends).
One example: if you currently own a company and pay yourself £8,000 in salary and £50,000 in dividends, your tax bill in 2016/17 will be £2,800 higher than it would have been under the old regime. Something for those who are thinking of avoiding the changes to buy-to-let taxation by shifting their houses into companies to think about before they make any moves.