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Summer Budget: Dividend tax regime overhauled

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Chancellor George Osborne has announced a major overhaul of the way dividends are taxed.

From April 2016, the dividend tax credit will be replaced by a new tax-free dividend allowance of £5,000 a year for all taxpayers

The dividend tax rates will then be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Dividends paid within pensions and ISAs will remain tax-free.

Osborne said: “We have inherited a very complex and archaic system. So I am today undertaking a major and long overdue reform to simplify the taxation of dividends.

“Those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax.

“85% of those who receive dividends will see no change or be better off.

“Over a million people will see their tax cut.”

The move to simply the dividend system has been widely welcomed, however Dermot Callinan, head of private client at KPMG, said it could discourage high-income savers.

“While a million people who receive dividends will see an effective £5,000 tax free allowance, the changes will increase top rate tax payers’ contributions by at least 25%. For all that the Chancellor wants to encourage saving, the new tax structure could discourage many high income investors from doing so. Savers should remember, however, that they can still receive up to £15,240 tax free through ISAs.”

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