Investment Income: Taxation

Treasury written question – answered on 4th December 2020.

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Photo of Theresa Villiers Theresa Villiers Conservative, Chipping Barnet

To ask the Chancellor of the Exchequer, what recent assessment he has made of the effect on small businesses of changes in the level of dividend taxes.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

Dividend tax is paid by individual shareholders rather than businesses. Dividend taxes were changed in 2016 and again in 2018. In 2016 the dividend tax credit was abolished and replaced with a new £5,000 allowance, and an increase of 7.5 percentage points was also introduced in each tax band. Over 75 per cent of dividend taxpayers either gained from or were unaffected by these changes, and about one million individuals benefited from a tax reduction on their dividend income due to the new Dividend Allowance. The full impacts were set out in the Tax Information and Impact Note published here:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/533150/TIIN_Dividends_Allowance_-_updated.pdf

This change was made to help address the incentive for some people to set up a company and make payments as dividends rather than as wages simply to reduce their tax bill. The changes simplified, reformed and modernised dividend taxation, helping to create a fairer tax system.

In 2018, the Dividend Allowance was reduced from £5,000 to £2,000 to ensure support for investors was targeted more fairly. About two thirds of all those with dividend income were unaffected by this measure. Only those individuals and households who were in receipt of dividend income between £2,000 and £5,000 were affected. The full impacts were set out in the Tax Information and Impact Note published here: https://www.gov.uk/government/publications/income-tax-dividend-allowance-reduction.

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