In an overhaul of the taxation of dividends, George Osborne decided it was time to end an ‘archaic’ regime.
Under the new system, anyone receiving dividend income will not pay tax on the first £5,000. Basic rate taxpayers will pay 7.5% tax on any additional dividend income, higher rate taxpayers will pay 32.5% and additional rate taxpayers 38.1%.
Under the old rules, those receiving dividends benefit from a 10% tax credit. Given the tax on dividends for basic rate taxpayers, they have been able to receive dividend income tax-free. The tax credit brought the 32.5% notional charge on dividend income for higher rate tax payers down to 25%, and the tax for those additional rate payers down to 30.6%.