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I'm reading a report about the effects of the introduction of the additional income tax rate in the UK, which was released in 2010 which can be found here. Table 5.1 shows a sudden jump in dividend income, followed by a sudden drop, during 2009-11 but the report only describes this as forestalling behaviour, can anyone explain why this happen. Is it because investors who were earning income just above the additional rate were trying to lower their income by placing their wealth in dividends before the arrival of the additional income tax rate

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The document refers to an increase in the top tax rate in the UK. And I think the comment below Table 5.1 answers your question:

As shown, there was a significant increase in dividend income in 2009-10 followed by a corresponding fall in 2010-11. This is thought to be the main source of the forestalling behaviour as it is the main source of income for owner-directors of companies who have much more flexibility than others in terms of the timing of their remuneration.

Basically it means that company directors saw this coming, and chose to increase dividends artificially in the short term to get ahead of the increase in taxes that would soon be imposed on them.

Dividends are a form of income, so company directors (who are also often shareholders) are in the unusual position of being able to decide their own income. They simply did the rational thing in this instance and chose to increase their pay in the short term in order to avoid some of the new taxes.

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  • $\begingroup$ One definition of forestalling is "to act in advance of (someone) in order to prevent them from doing something.". It looks like the owners of small companies in the UK acted before the tax increase to (partially) counter its effect by declaring a bigger dividend to themsleves one year and a lower one the next. $\endgroup$ – noob2 May 18 '17 at 12:01

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