Are Capital Gains taxed at higher rate than Dividend Income in UK?

Question

I'm doing a paper on Marginal tax inference for the period 2005 - 2006 in UK. I ended up discovering that for earnings below £8500, capital gains are tax shielded. For earnings between £8500 - £32,500, one would prefer dividend payments as they are charged at 10% whereas capital gains are charged at 20%. The high earning individuals would also prefer dividends as they are taxed at 32.5% in contrast to 40% taxed capital gains. I always thought capital gains were more tax friendly than dividend earnings.

Answer 1

For the tax year in question the basic facts are as you stated.  However there are several tax breaks for capital gains tax that are not available for dividends - for example capital gains may be abated depending upon the nature of the asset sold and/or the length of time for which it has been held.  As a result some capital gains may only be subject to an effective tax rate of 10% and hence the revision of the capital gains tax legislation this year that ensures that all taxable gains above the annual exemption are subject to tax at 18%.

Answer 2

Your anaylsis is right, but your conclusion is somewhat dated - the days when capital gains wre taxed at a lower rate than income disappeared some years ago.