Budget 2009 - 25% +10% = 36 1/9%

Explaining the basis of the calculation of the higher rate of income tax due on dividends has always been something of black art, largely involving boring the audience into submission and concluding with the “because I say so” clincher. But the new, shorthand, effective rate of 25% extra income tax payable by individuals and trustees must now be 35%, right ?  Errm. No.

The current dividend upper rate is 32.5% which, net of the dividend tax credit, gives a 40% taxpayer a higher rate liability equivalent to 25% of the dividend. This arithmetic will continue to hold good, post 6 April 2010, for those higher rate taxpayers with a total income of not more than £150,000.

For those individuals with a total income of more than £150,000 (and trustees with an income of more than £1,000) the new dividend additional rate is 42.5% (32.5% plus 10%) which, at first blush, seems logical. But, it is not. Well, at least it is not if there is a genuine intention to assess only a further 10% higher rate tax, because the extra tax which will be due is going to be 11 1/9 %.  (To give an additional 10% payable the new dividend additional rate would have to be 41.5%, and not 42.5%.) 

The current and new position for those who will be liable to the new dividend additional rate is illustrated here. 

Let's hope this is an oversight which gets acted upon when the Finance Bill goes to committee.