Summer Budget accused of ‘stifling aspiration’

Otmane El Rhazi from Mindful Money » Shares.

The chancellor has been accused of ‘stifling aspiration’ by restricting dividend and buy-to-let allowances in the summer Budget.

 

Karen Clark, a tax expert at accountants Baker Tilly, said simplification of the tax system for basic rate taxpayers was an ‘emerging theme’ from the Conservatives but it was coupled with ‘significant further complexity for companies and high-income individuals’.

 

In particular she points to the radical overhaul of the dividend tax regime. The current regime is being scrapped and replaced by a tax-free dividend allowance of £5,000, with higher taxes on dividend income above the allowance.

 

Those who receive dividends at the moment benefit from a 10% tax credit. As the tax on dividends for basic rate taxpayers is 10%, dividends are tax free.

 

The credit  means the 32.5% paid on dividend income by higher rate taxpayers is reduced to 25% and for additional taxpayers it is reduced to 30.6%. Under the new system, everyone who receives dividend income will not pay tax on the first £5,000, basic rate taxpayers pay 7.5% tax on additional dividend income, higher rate taxpayers pay 32.5% and additional rate taxpayers 38.1%.

 

‘It is worth asking whether the bundle of tax changes for individuals proposed by the chancellor risks stifling aspiration,’ said Clark.

 

‘While the dividend tax allowance will benefit those with only modest savings income, holders of larger investment portfolios will find their tax bills rising as the new dividend tax regime takes effects. While the dividend tax allowance will benefit those with only modest savings income, holders of larger investment portfolios will find their tax bills rising as the new dividend tax regime takes place.’

 

Clark said higher dividend tax was coupled with the restriction on buy-to-let property that will reduce post-tax return on rental income by reducing mortgage interest relief. From April 2017, the higher rate reliefs available to landlords will be reduced to the basic rate over four years.

 

‘Even in the current relatively low-interest environment, that may feed through to increases in rents,’ said Clark. ‘When interest rates begin to rise, it’s almost inevitable that rents will do likewise in response to the tax changes.’

 

She added: ‘Once they have come to terms with the changes, high-earners who contribute to pension plans will quickly come to the view that they are simply one tax-preferred means of providing for post-retirement income. Once tax limits have been reached, it’s necessary to pursue other investment policies.’