Boris Johnson’s £600m dividend tax raid could deter investors, dampen entrepreneurial activity and damage the City of London’s reputation as a good place to do business, experts have warned.
The government launched a tax assault yesterday in a bid to raise money to pay for clearing the swelling backlog of NHS work and to fix England’s ailing social care system.
Johnson hiked dividend taxes by 1.25 percentage points yesterday, meaning investors, small business owners and company directors will have to pay more tax on income they receive from owning shares in a company.
The rise is expected to raise an extra £600m for health and social care and will come into effect in April next year.
Brokers and investment groups labelled the increase as a “kick in the teeth” for investors.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, noted investors have had to cope with a dividend draught amid the pandemic, saying “this will feel like a particularly nasty attack on their income.”
Moira O’Neil, head of personal finance at Interactive Investor, said: “Targeting dividends is a kick in the teeth for people who are prudently investing for the long term in companies that reward shareholders with regular payments.”
Tom Selby, head of retirement policy at AJ Bell, said: “The increase in dividend tax means people investing outside tax sheltered wrappers like pensions and ISAs should review their portfolios.”
There are also concerns the dividend tax hike will unfairly hit self-employed workers that were largely overlooked by the government when distributing Covid financial support.
Many self-employed workers are freelancers who earn relatively little compared to PAYE workers, but often pay themselves through dividends for tax purposes to maximise their income.
Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed, said: “This new tax hike on dividends will make it almost impossible for freelancers to continue to work through a limited company.”
A large proportion of the receipts generated by the dividend tax hike will be sourced from business owners, who do not receive income through payroll, but often through dividends, raising questions over whether a more punitive dividend tax regime will disincentivise entrepreneurship in the UK.
Mike Cherry, national chair fo the Federation of Small Businesses, said the more punitive dividend tax regime sends “completely the wrong message” to people considering setting up a new business.
The stricter dividend tax regime comes as Johnson introduced a new health and social care levy of 1.25 per cent – initially to be attached to national insurance and then broken out as a separate tax – which will eat further into Brits’ incomes.
Consultancy Capital Economics estimates the national insurance hike could threaten as many as 130,000 jobs.