UK Budget: Taxation of dividend income

[AyG]

The Chancellor has announced that dividend tax credit will be abolished (boo! hiss!), but the first £5,000 of dividend income will be tax free (hurrah!), but after that it will be taxed progressively (boo! hiss! again). For 20% rate tax payers the tax rate is 7.5%, for 40% it's 32.5%, and for 45% it's 38.1%. (The current rates are respectively 0%, 25% and 30.56%.)

If this is applied to non-residents this is clearly a bad thing - particularly given that in the past there has been a concession that there's no income tax to pay on dividend income irrespective of amount. (The tax deducted at source has been deemed sufficient.)

If you're non-resident with no other UK income the situation isn't too bad. Combining the £5,000 with the personal allowance of £11,000 that suggests one can have the first £16,000 of dividend income tax free. Assuming a 3% dividend yield, one could hold about £533,000 in shares and not pay income tax.

This comes into effect in April next year.

Source: http://www.telegraph.co.uk/finance/personalfinance/investing/shares/11726664/Budget-2015-investors-face-tax-raid-on-dividends.html

(Wasn't sure whether to post this here or in "Home Country". Sorry, mods, if I made the wrong choice.)

[chiang mai]

I believe it is also the case that the first 5k of savings interest is also free of tax.

http://www.thisismoney.co.uk/money/saving/article-3117390/New-rule-lets-claim-5-000-tax-free-allowance-claim.html

[KittenKong]

I've seen no suggestion anywhere that the current concessions for non-residents of no tax on dividends or interest, beyond those levied at source, will change.

We will see.

[KittenKong]

I believe it is also the case that the first 5k of savings interest is also free of tax.

http://www.thisismoney.co.uk/money/saving/article-3117390/New-rule-lets-claim-5-000-tax-free-allowance-claim.html

Not quite that simple. It only applies if your total non-savings income is less than the personal allowance. Also in order to get the interest paid-tax free you have to fill in a R85 form (not for use by non-residents) or use a R40 to reclaim the interest later.

Non-residents would probably be better off using R105 to get the interest paid gross in the first place, though it does all rather depend on individual circumstances: notably what the non-resident may have in the way of pension or rental income.

[rak sa_ngop]

"If this is applied to non-residents this is clearly a bad thing - particularly given that in the past there has been a concession that there's no income tax to pay on dividend income irrespective of amount. (The tax deducted at source has been deemed sufficient.)"

I think you will find that this statement is incorrect. The Tax Credit on dividends was sufficient to cover the lowest tax band up to about 30,000+ pounds income. Above this figure dividends are liable to a higher tax band.

Quote:

Any UK dividend income that comes to £31,785 (£31,865 in 2014-15) or less when added to non-savings income and savings income will be taxed at 10% (offset by a tax credit of 10% when you receive the dividend, meaning no further tax will be payable).

Any UK dividend income that comes to more than £31,785 (£31,865 in 2014-15) when added to non-savings income and savings income will be taxed at 32.5% (taking into account the 10% tax credit, the effective tax you pay on the dividend you receive will be 25%). If it comes to more than £150,000, it will be taxed at 37.5 Unquote

I do not think being an expat makes any difference as the dividends are generated in the UK

[AyG]

I think you will find that this statement is incorrect. The Tax Credit on dividends was sufficient to cover the lowest tax band up to about 30,000+ pounds income. Above this figure dividends are liable to a higher tax band

My statement is correct. For non-residents UK dividends constitute "disregarded income" and no income tax liability arises upon them.

You can read about this at http://www.hmrc.gov.uk/manuals/saimmanual/saim1170.htm

Edited July 9, 2015 by AyG

[rak sa_ngop]

I think you will find that this statement is incorrect. The Tax Credit on dividends was sufficient to cover the lowest tax band up to about 30,000+ pounds income. Above this figure dividends are liable to a higher tax band

My statement is correct. For non-residents UK dividends constitute "disregarded income" and no income tax liability arises upon them.

You can read about this at http://www.hmrc.gov.uk/manuals/saimmanual/saim1170.htm

OK, I will look into this with my tax advisors. Meeting next week.

[GavinK]

I think you will find that this statement is incorrect. The Tax Credit on dividends was sufficient to cover the lowest tax band up to about 30,000+ pounds income. Above this figure dividends are liable to a higher tax band

My statement is correct. For non-residents UK dividends constitute "disregarded income" and no income tax liability arises upon them.

You can read about this at http://www.hmrc.gov.uk/manuals/saimmanual/saim1170.htm

If you go the 'disregarded income' route then you cannot claim personal allowances. That might be ok if you only have dividend and interest income earned in the UK.

[AyG]

I think you will find that this statement is incorrect. The Tax Credit on dividends was sufficient to cover the lowest tax band up to about 30,000+ pounds income. Above this figure dividends are liable to a higher tax band

My statement is correct. For non-residents UK dividends constitute "disregarded income" and no income tax liability arises upon them.

You can read about this at http://www.hmrc.gov.uk/manuals/saimmanual/saim1170.htm

If you go the 'disregarded income' route then you cannot claim personal allowances. That might be ok if you only have dividend and interest income earned in the UK.

I don't believe you're correct, and that certainly doesn't reflect my personal experiences. However, if you can find a link to an authoritative source to justify your assertion I'd be most interested.

[salavan]

This may all change in 2017 if the goverment carry out there threat to abolish personal allowance for non resident british citezens

[KittenKong]

I think you will find that this statement is incorrect. The Tax Credit on dividends was sufficient to cover the lowest tax band up to about 30,000+ pounds income. Above this figure dividends are liable to a higher tax band

My statement is correct. For non-residents UK dividends constitute "disregarded income" and no income tax liability arises upon them.

You can read about this at http://www.hmrc.gov.uk/manuals/saimmanual/saim1170.htm

If you go the 'disregarded income' route then you cannot claim personal allowances. That might be ok if you only have dividend and interest income earned in the UK.

I don't believe you're correct, and that certainly doesn't reflect my personal experiences. However, if you can find a link to an authoritative source to justify your assertion I'd be most interested.

GavinK is correct.

HMRC should disregard your personal allowance if you opt to take advantage of the concessions relating to gross interest and dividends. So, as mentioned, the concession is probably of most interest to those with little taxable UK income.

[partington]

I think you will find that this statement is incorrect. The Tax Credit on dividends was sufficient to cover the lowest tax band up to about 30,000+ pounds income. Above this figure dividends are liable to a higher tax band

My statement is correct. For non-residents UK dividends constitute "disregarded income" and no income tax liability arises upon them.

You can read about this at http://www.hmrc.gov.uk/manuals/saimmanual/saim1170.htm

If you go the 'disregarded income' route then you cannot claim personal allowances. That might be ok if you only have dividend and interest income earned in the UK.

I don't believe you're correct, and that certainly doesn't reflect my personal experiences. However, if you can find a link to an authoritative source to justify your assertion I'd be most interested.

He is absolutely correct- dividend and interest income is only tax free for non-residents who do not claim the personal allowance: this is mentioned on the HMRC website as well as by several financial advisor sites.

e.g HMRC site : https://www.gov.uk/government/publications/non-residents-and-investment-income-hs300-self-assessment-helpsheet/hs300-non-residents-and-investment-income

extract (my emphasis):

"How is investment income charged to tax

With the exception of income from property in the UK and investment income connected to a trade in the UK through a permanent establishment, the tax charge for non-residents on investment income arising in the UK is restricted to the amount of tax, if any, deducted at source. If the tax charge is limited in this way, personal allowances will not be given against other income. This restriction does not apply in the overseas part of a split year."

Edited July 9, 2015 by partington

[KittenKong]

However, if you can find a link to an authoritative source to justify your assertion I'd be most interested.

It actually says it in the link you posted:

....... a non-UK resident’s income tax liability is limited to the sum of

* tax deducted from, or treated as deducted from, or tax credits on ‘disregarded income’, and

* the tax liability leaving out the disregarded income and with no personal allowances or double taxation relief taken into account.

[wordchild]

I wonder if, in the medium term, we will see a withholding tax ( at 7.5% or higher) introduced for UK dividends. It would seem to be the logical next step as the Chancellor has, with this announced change, moved significantly away from any notion of special treatment for income that has already borne tax once at the company level.

Edited July 9, 2015 by wordchild

[KittenKong]

I wonder if, in the medium term, we will see a withholding tax ( at 7.5% or higher) introduced for UK dividends. It would seem to be the logical next step as the Chancellor has, with this announced change, moved significantly away from any notion of special treatment for income that has already borne tax once at the company level.

The chancellor said quite clearly that he wants to promote saving of all types. To introduce a new tax on dividends would not be compatible with this, nor would it be compatible with this new tax-free dividend allowance.

Also he seems to be moving away from the idea of withholding taxes generally with the introduction of the tax-free savings interest band, as a result of which 95% of savers will pay no tax on deposit interest.

Modern technology does make withholding taxes less necessary as income can easily be reported electronically to HMRC by whatever company pays it and any tax due charged accordingly via the tax coding.

[PattayaPhom]

Make use of your annual tax free wrapper using ISAs, divis are free of tax. ISA allowances are now quite generous compared to befor.

[AyG]

Make use of your annual tax free wrapper using ISAs, divis are free of tax. ISA allowances are now quite generous compared to befor.

Except most of us here are expats and not resident in the UK. Can't open new ISAs as a non-resident.

In any case, UK share dividends are rarely free of tax; the government grabs 10% of the dividend before it gets to you, even in an ISA.

[fletchsmile]

I wonder if, in the medium term, we will see a withholding tax ( at 7.5% or higher) introduced for UK dividends. It would seem to be the logical next step as the Chancellor has, with this announced change, moved significantly away from any notion of special treatment for income that has already borne tax once at the company level.

The chancellor said quite clearly that he wants to promote saving of all types. To introduce a new tax on dividends would not be compatible with this, nor would it be compatible with this new tax-free dividend allowance.

......

Think we can take what the Chancellor says - like most politicians - with a large pillar of salt. That's the impression he'd like us to have, but the reality obviously differs.

"promote savings of all types' - don't think he can really claim "all":

- The changes being discussed here will effectively mean those with small amounts of dividends could well be better off. Higher rate tax payers with larger portfolios though will likely be worse off under these tax changes. So this policy doesn't promote investing in equities to higher rate payers with large portfoflios

- Another one is the progressive reduction in pension allowances for higher rate tax payers. Every 2 pounds above 150k a year someone earns will reduce the allowance by 1 pound, until it reaches and allowance of only 10k. Again not really promoting pension investments to higher rate tax payers.