The cut to the dividend allowance has dragged more investors and company directors into the tax net, latest figures from HM Revenue & Customs show.
In November, the Chancellor announced that the tax-free allowance for dividend income would be cut from £2,000 to £1,000, with a further reduction to £500 to be introduced in April 2024.
According to HMRC’s figures, the Government is expected to take £17.6 billion from investors and company directors in the 2023-24 tax year, an uptick of more than £2 billion from the previous year. In addition, Government estimates for the dividend tax in 2022-23 have increased from £14.4 billion to £15.8 billion – providing an additional £1.4 billion for Government coffers.
Laura Suter, head of personal finance at AJ Bell, said: “The bulk of the increase this tax year comes from additional rate taxpayers, who are estimated to pay 23% more in dividend tax this year. The combination of the additional-rate threshold being lowered and the dividend tax allowance being cut means far more people are facing tax on their dividends at the highest rate of 39.35%.”
Investors with significant assets outside ISAs and pensions have been hit by three factors in the past few years; a raising of dividend tax rates, a reduction in the tax-free allowance and changes to the additional rate threshold, all of which have led to higher tax bills.
Suter continued: “This tax squeeze will continue next year when the tax-free allowance is cut again to £500, meaning even those getting very modest dividends will face a tax charge. An estimated 1.8 million more people will be caught in the dividend tax net in the next two years. Around 635,000 more people will pay tax on dividends in the current tax year, and 1,115,000 additional individuals will be brought into paying dividend tax from April 2024. It’s not just the tax hit but the administrative burden too, as the sheer number of small shareholders who are going to be brought into paying dividend tax means that many will now be required to fill in a tax return for the first time.”
Suter added: “But investors are acting. We saw a surge in Bed and ISA transactions towards the end of the tax year in April and we expect that to continue this year, as more people shelter their money in tax-efficient accounts. On top of that more people will be transferring assets to a lower-tax-paying spouse or using pension contributions to drop to a lower income tax band.”
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