The dividend tax credit will be replaced with a new tax-free allowance of £5,000 of dividend income for all taxpayers, the Chancellor has revealed.
He announced what he called “a major reform to simplify the taxation of dividends” in the Budget today.

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.

There will be an increase of 7.5% where dividend income exceeds £5,000.

The Treasury stated in the official Budget report: "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."

Dividends paid within pensions and ISAs will remain tax-free and unaffected.

George Osborne said: “The dividend tax system was designed partly to offset double taxation on profits.

“But the system has not changed despite sharp reductions in corporation tax. Lower rates are creating rapidly growing opportunities for tax planning. We have inherited a very complex and archaic system.

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“So I am today undertaking a major and long overdue reform to simplify the taxation of dividends.

“Those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax. 85% of those who receive dividends will see no change or be better off.”

He added: “Over a million people will see their tax cut.”

This will come into operation next year.

Mr Osborne said: “With our Personal Allowance and our new Personal Savings Allowance it means that from April – on top of the New ISA – people will be able to receive up to £17,000 of income a year tax free.

“The reforms I’ve announced to dividend taxation also allow us to do something more – and go further in creating a Britain that is one of the most competitive economies in the world.”