Text below from the Governments Red Book on the Summer Budget July 2015:
The current system of tax credits on dividends was designed over 40 years ago when corporation tax was more than 50% and the total tax bill on dividends for some was more than 80%. Since then, tax rates including corporation tax have fallen, leaving the Dividend Tax Credit as an arcane and complex feature of the tax system.
Alongside further cuts to corporation tax rates for all businesses, the government will reform and simplify the system of dividend taxation, while maintaining the extensive tax reliefs for investments held in ISAs and pensions. From April 2016 the government will remove the Dividend Tax Credit and replace it with a new tax-free Dividend Allowance of £5,000 a year for all taxpayers. This will ensure that ordinary investors with smaller portfolios and modest dividend income will see no change in their tax liability – and some will pay less tax.
The government will set the dividend tax rates at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.
These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax-motivated incorporation (TMI) by £500 million a year from 201920. The tax system will continue to encourage entrepreneurship and investment, including through lower rates of Corporation Tax.