Landlords could be forgiven for thinking Chancellor George Osborne is cracking down on the amount of tax they pay.

In the furore over mortgage interest relief and the new wear and tear allowance, landlords with companies may have overlooked the new dividend allowance that comes in from April 2016.

Heralded as a tax free allowance, the final details published by HM Revenue & Customs (HMRC) make clear this is a new tax and not a tax saving solution.

Out goes the dividend tax credit for basic rate taxpayers and instead, in comes the dividend allowance.

Basically, shareholders in companies and investors in stocks and shares receive the first £5,000 of dividends tax-free.

Any dividends paid into pensions or ISAs are exempt, so these taxable dividends come from direct investments in the shareholder’s name.

The devil is in the detail.

If dividends exceed the £5,000 limit, income tax is paid at rates that align with the taxpayer’s marginal rate:

  • 7.5% up to the basic rate threshold
  • 32.5% up to the higher rate threshold
  • 38.1% for additional rate taxpayers

A landlord paying income tax at the basic rate with an income of £25,000 and £5,000 in dividends from the profits of a property company will see no change in the amount of tax paid.

​However, the same landlord taking £10,000 of dividends and a £25,000 salary currently pays no extra income tax, but under the new regime faces paying an extra £375 (£5,000 x 7.5%).

Accountants have criticised the new dividend allowance as a stealth tax.

“As this measure was announced as a tax-free allowance, it is understandable that taxpayers believed the dividend allowance would operate outside of an individual’s tax rate bands,” said a spokesman for the Association of Accounting Technicians (AAT).

“To discover that the allowance is in fact restricting the amount of dividends that a basic rate taxpayer can currently receive without a tax liability is a fairly big shock. It also raises questions as to the real policy intention behind this measure.”

Read HMRC guidance and examples for the dividend allowance

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