Autumn Budget: How could Rachel Reeves change dividend tax rules?
The Treasury has reportedly turned its attention to dividends as part of its efforts to fill up the public coffers in this month’s Budget.
Chancellor Rachel Reeves is considering raising dividend taxes on 26 November, a move that could potentially raise £1.5bn according to the Resolution Foundation think tank.
The speculation comes as the Treasury scrambles to fill an estimated £20bn fiscal black hole, with a range of other tax rises, including changes to salary sacrifice contributions and the cash ISA ceiling, also under deliberation.
Proposed changes to dividend tax regime
Individuals who take dividends from a company or who earn dividends from shares pay different tax rates according to the income tax band they fall under.
Under the rules, basic rate taxpayers are charged 8.75 per cent, while higher rate taxpayers are slapped with 33.75 per cent.
Meanwhile, additional rate payers are charged 39.35 per cent.
The Resolution Foundation called for a basic rate tax rise to at least 16.5 per cent, with the think tank believing the current rate is “low by any standard” compared to other UK taxes, such as capital gains tax, and rates set by other countries.
This includes Ireland where the basic rates hovers at 20 per cent, whereas in Denmark dividend beneficiaries pay a flat rate of 27 per cent.
It is understood Reeves’ is mulling a smaller increase, amid worries that too large a hike would hit low earners and pensioners particularly hard.
Investors and business owners feel the heat
While the decision could raise a significant amount for the Treasury, it would be a severe blow to business owners, particularly those who take a large portion of their pay through dividends. Any hike would also hit retail investors at a time when Reeves is pushing for increased investment in the stock market.
The Treasury has been urging pension funds and retail investors to back London listed companies in recent months in order to revive the UK market and boost economic growth.
But wealth managers have warned that a potential rise to dividend tax could discourage domestic investment and cause people to look abroad for growth opportunities.
Retail investors also have to contend with the decision of the previous Conservative government to cut the annual tax-free dividend allowance to £500 from April 2024.
This was a decrease from £1,000 in 2023, and from £5,000 in the 2017-2018 financial year. Reeves is understood to be considering abolishing the tax-free amount.
Tax-free wrappers
Those who hold shares outside tax-free wrappers should consider moving funds into accounts such as pensions or ISAs, in order to avoid having their earnings swallowed up by an increased dividend tax.
Dividends in pensions can accumulate without being subjected to either dividend or capital gains tax and do not take up any of the £500 allowance making them a suitable option, however investors are unable to access the funds until they reach 55 in most instances.
While the cash ISA ceiling is facing a potential slash to £10,000, dividends in stocks and shares accounts are shielded from income tax up to £20,000, while also being free from the dividend allowance.