On the 1st of April, Dividend Withholding Tax (DWT) replaced Secondary Tax on Companies (STC), a form of taxation that was in effect for many years. While the new tax may have an effect on the value of your investments over the long term, it differs from person to person depending on how much you have invested in shares and for how long. The following main points about DWT should make this new tax a little clearer:
DWT vs. STC
Under the old STC legislation, listed companies would deduct 10% tax from dividends before they were paid over to shareholders. Similar to PAYE for employees, this system put the onus on companies to pay tax on dividends, deducting it from shareholders’ dividend pay-outs. DWT no longer makes it possible for companies to deduct tax from dividend pay-outs, but requires that shareholders pay 15% tax on dividends. This means that there is an effective 5% increase in tax on dividends.
The Good News
Although the average shareholder will now pay 6.5% more tax on dividends, many investors will take heart from the fact that DWT applies only to dividends, not capital gains. This means that investors who have placed a large chunk of their investment capital in growth shares which pay small dividends or none whatsoever will not be affected by the new legislation.
If you have invested in a retirement fund, there is further good news for you. Because retirement funds are exempt from paying tax on returns, the tax which was previously deducted from your dividends under STC will now be included in your dividend payment.
DWT: A Small Change
Whether you pay extra tax on shares with a high dividend yield or save on taxes by investing in a retirement fund, the percentage gained or lost is unlikely to be greater than 2%. While DWT does represent an additional form of taxation, its impact on the average shareholder will not be huge.