HM Revenue & Customs has offered further guidance on how dividend tax will be applied when new legislation recently announced in the Finance Bill 2015 comes into force next year.

Chancellor George Osborne revealed the new tax on dividends in the first Conservative budget in July; however, there has been confusion about the new £5,000 tax-free allowance and how exactly this would be applied.

HMRC has now published a factsheet stating that the new allowance is entirely a zero-rate band and offering further examples of how investors and workers will pay tax on dividends greater than £5,000.

In addition, basic rate taxpayers will now have to pay a higher 7.5% tax rate on dividend incomes, while higher rate and additional rate tax payers will pay 32.5% and 38.1% respectively.

Critics have claimed that the move will have a detrimental impact on the flexible workforce and other self-employed individuals, as the risks of going it alone or starting up a new business will be greater.
An article by The Practitioner following the budget stated: “We all know the extra risk, sweat, tears and sacrifice that comes with running your own business and for that there has to be some differential. Tax is one way currently that this can be achieved. Close that gap and the reward for the risk becomes less.”

The Finance Bill 2015 will also affect contractors and freelancers taking their income via limited companies. These individuals have often been able to pay lower amounts of tax; however, this could be set to change if the bill is passed through parliament in 2016.

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