• 1.25% Dividend tax hike designed to spread the pain of NI increase
• Move will raise £600m from investors and self-employed
• Likely to hit company directors more than retail investors
• Highlights the importance of tax wrappers such as ISAs and pensions
Laura Suter, head of personal finance and AJ Bell, comments:
“The dividend tax hike looks very much like a last-minute policy addition positioned as spreading the pain of tax increases across society. Investors and the self-employed will collectively pay £600m more in tax as a result of the move. However, it will be felt the most by company directors, including the self-employed and contractors, who pay themselves via company dividends in addition to salary. The move means that anyone taking home more than £2,000 a year in dividends will now face a slightly higher bill. At £10,000 of dividends this equates to £100 a year more, regardless of your tax bracket, while at £20,000 a year it means an extra cost of £225.
“Retail investors will only be impacted if they have significant portfolios outside of a pension or ISA as these shelter dividends from tax. Even then, they will only be caught and face a higher tax bill if their annual dividends are over the annual dividend allowance of £2,000. To be in that position you’d have to have a portfolio of over £50,000 if it was yielding 4% a year and the Government estimates that around 60 per cent of people who have dividend income outside of ISAs will not see a tax increase next year.
“Those who receive dividend income have faced a series of tax hikes in recent years, with the tax-free dividend allowance being slashed by 60% from £5,000 to £2,000 in 2018 and a rise in tax rates before that. These successive moves means it’s never been more beneficial for investors to put their money in ISAs or pensions and with generous £20,000 and £40,000 annual limits respectively, investors can start shielding money from the taxman right away.”
Dividend tax rate changes:
|
Tax band |
Current dividend tax rate |
New dividend tax rate |
|
Basic rate |
7.5% |
8.75% |
|
Higher rate |
32.5% |
33.75% |
|
Additional rate |
38.1% |
39.35% |
Impact of the dividend tax increase on annual dividends of £5,000, £10,000 and £20,000 in different tax bands:
|
Tax band |
Tax paid on £5,000 dividend at current rate |
Tax paid on £5,000 dividend at new rate |
|
|||
|
Basic rate |
£225 |
£263 |
|
|||
|
Higher rate |
£975 |
£1,013 |
|
|||
|
Additional rate |
£1,143 |
£1,181 |
|
|||
|
Tax band |
Tax paid on £10,000 dividend at current rate |
Tax paid on £10,000 dividend at new rate |
|
|||
|
Basic rate |
£600 |
£700 |
|
|||
|
Higher rate |
£2,600 |
£2,700 |
|
|||
|
Additional rate |
£3,048 |
£3,148 |
|
|||
|
Tax band |
Tax paid on £20,000 dividend at current rate |
Tax paid on £20,000 dividend at new rate |
|
|||
|
Basic rate |
£1,350 |
£1,575 |
|
|||
|
Higher rate |
£5,850 |
£6,075 |
|
|||
|
Additional rate |
£6,858 |
£7,083 |
|
|||
