As many as 1.8 million more people will pay dividend tax amid the Government’s tax raid, according to AJ Bell, with small shareholders set to bear the brunt of forthcoming tax cuts.
A Freedom of Information request by the investment platform found 635,000 more people will pay tax on dividends in the coming tax year when the tax-free allowance is halved from £2,000 to £1,000. A further 1,115,000 more individuals will be hit from April 2024 when the allowance is cut again to just £500.
AJ Bell said the impact would be felt among small shareholders and business owners who will become exposed to dividend tax on modest amounts of income as a result of the forthcoming Government cuts.
In total, HMRC estimates that 4.4 million people will be affected by the dividend allowance cut in 2024/25, when taking into account those who already pay dividend tax.
Laith Khalaf, warned that small shareholders will be hit with a “tax tsunami” from April.
Khalaf said: “Small shareholders face a tax tsunami from April, because on top of frozen income tax thresholds, and the cut to the dividend allowance, the government has also taken an axe to the capital gains tax allowance. The result is 260,000 more individuals and trusts will be paying CGT for the first time by 2024/25.”
Currently CGT on share sales is charged at 10% for basic rate taxpayers, and 20% for higher rate taxpayers, with an additional 8% surcharge on property transactions. This means an investor who is making £12,300 of gains a year would currently incur no capital gains tax, however basic rate taxpayers will have to pay an extra £930 in CGT each year, while higher rate taxpayers will be expected to pay an extra £1,860 a year when the allowance is reduced to £3,000 in April 2024.
Khalaf continued: “A very wealthy individual harvesting £1 million in capital gains a year will also face additional tax of £1,860 as a result of the smaller capital gains tax allowance. So the cut to the allowance hits small shareholders every bit as much as the very wealthy in pounds and pence. But it will hurt a lot more in relation to the size of their gain.
“The sheer number of small shareholders who are going to be brought into paying dividend tax and capital gains tax means that many will now be required to fill in a tax return for the first time, and engage in capital gains calculations, which can be incredibly complex.”
He added: “It’s fair to point out there are generous tax shelters like ISAs and SIPPs available to small shareholders to protect their investments from both capital gains tax and dividend tax. But for those lucky enough to have a bit more money to invest, or for those who are simply not organised enough to hold their shares in an ISA, the coming tax tide is a force to be reckoned with.”
