How will the New Dividend Tax in the UK Affect Dividend Policies and Investors?

Whilst many of us 'average Joe's' will not have had to worry about paying tax on dividends before, come April 2016, taxpayers will have to declare any dividend earnings over our tax free personal allowance (£11,000 16/17) and the £5,000 tax free dividend allowance (another tax I hear you cry out, the government always finds another way to dip into our pockets). The table below shows the changes that will be made from current dividend tax-rates to the new tax-rates. 

So how will/will this affect the common investor and company dividends policies in the future under the new laws? This is what I will be trying to evaluate in this blog.

I would first like to start with the individual common investor (as it could affect me in future, so where better to begin?). Under the new law, as a basic-rate investor, I would have a £5,000 dividend allowance before the taxman would then take 7.5% off me. So therefore I believe it will affect a common investor to an extent as before the tax-rate on dividends for basic-rate was 0% (any tax at 0% is absolutely fine with me, not 7.5% though).
Before I use an example, it must be noted that to get dividends of over £5,000 you would need a considerably high amount of investments in high dividend paying companies (£63,000 portfolio according to Clare Walsh, a financial planner from Aspect 8 (Telegraph, 2015)). Take myself for example; when I finish university I will be in a graduate job which pays above the personal tax-free allowance (a lot of other investors will be on more). Therefore I would be within the dividend allowance (as I do not have enough investments). But if I did, I would pay Income Tax of 20% and Capital Gains Tax of 18% (if I had investments large enough) on top. I really believe that for the risk I would be taking, some form of investment 'gain' should be tax free.

Of course, I believe it will affect the higher-rate taxpayer or basic-rate with a large portfolio more. I found an interesting article on Accountancy Age (I started using this when doing a placement in a Top 10 accountancy firm) which was talking about how SME owners (the individuals in the business) are "in a race against time to benefit from a special dividend pay-out" (Accountancy Age, 2016). This is understandable as the higher tax rate will really damage the value they have created if they want to take dividends out after April 2016. Of course, from what I have learnt in the module, the 'realised profits' have to be there before they can pay-out the dividends. If the owner of the SME took out £100,000 (for arguments sake, an easy number), with them being a high-rate taxpayer, they would pay £25,000, under the new system they would pay £30,875 (quite a lot more really if you scale it up).

Second on the agenda is how the new Dividend Tax will affect company's policies. In my opinion I do not believe it will affect their dividend policies and they will not switch to share repurchase schemes to help investors. This is due to many large companies' main investors being institutional investors such as pension schemes or insurance companies who would not be affected. As this is the case, I have learned that managers will use 'catering theory' to cater to the wishes of investors (such as those institutions) who want both higher share prices AND dividend payments to grow their funds.

Also, a company that says 'we are not going to give anymore dividends' will have a dramatic drop in their share prices due to their investors having certain tax preferences; known by researchers as Clientele Theory. If I have learnt something from this module it is that investors do not think rationally. See British Airways as an example, in 2010, they did not pay a dividend due to a pension obligation, this resulted in people selling of their shares and the price being reduced (I think that if a company does not have to reduce dividend payments, then they won't do it).

To conclude, in my opinion, the new dividend tax will affect the common investor and high paid investor who has a job which pays above the personal tax-free allowance, however this will not affect companies at all. I find this really unfortunate as it is always the public who suffer rather than the large companies that can afford it and will just try to avoid the taxes anyways.

References

Accountancy Age. (2016). SMEs set to take Advantage of Dividend Pay-outs. Retrieved 29th February 2016, from http://www.accountancyage.com/aa/news/2448321/smes-set-to-take-advantage-of-dividend-pay-outs/

Telegraph. (2015). New Dividend Tax: How it Works - and How to Avoid it. Retrieved 29th February 2016, from http://www.telegraph.co.uk/investing/shares/new-dividend-tax-how-it-works--and-how-to-avoid-it/