Dividends and taxes

Here is the best explanation I have seen so far on the Chancellor's changes to the dividends tax regime:

Currently, those receiving dividends benefit from a 10% tax credit. So for basic rate taxpayers, for example, the 10% tax credit means the 10% tax levied on dividend payments is reduced to zero. It is a notional credit: basic rate taxpayers don't pay the 10% tax and then receive a refund, they just don't pay tax.

This notional credit mean the current tax rates on dividends are effectively:

• zero for those paying the 20% basic rate of income tax;

• 25% for those paying the 40% higher rate of income tax and

• 30.6% for those paying the additional 45% rate.

Under the new system, all those who receive dividends won't pay tax on the first £5,000. After that, they will be taxed at the following rates:

• 7.5% for basic rate taxpayers;

• 32.5% for higher rate taxpayers;

• 38.1% for additional rate taxpayers.

It's worth noting that all these tax rates – both before and after the changes – relate to dividends received outside of ISAs and pensions. Dividends in ISAs and pensions are tax-free.