Chancellor George Osborne is scrapping the dividend tax credit, introducing a £5,000 tax-free dividend in its place.
On top of that, tax rates on dividend income are rising.
Basic rate taxpayers – who currently pay 10 per cent, although this is offset by the tax credit – will pay 7.5 per cent on dividends outside the £5,000 allowance. Higher rate taxpayers will pay 32.5 per cent, up from the 25 per cent paid once the tax credit was incorporated, while additional rate taxpayers will pay 38.1 per cent tax.
Dividends paid within Isas and pensions will remain tax-free.
The changes will be implemented for all taxpayers from April 2016, the chancellor said today.
Osborne said the changes would simplify a complex historical system, and result around 85 per cent of investors paying the same or less tax.
The changes won't affect basic rate payers, but for there will be a saving for some higher rate taxpayers – those who earn less than £5,000.
Pensioners look to be the biggest potential winners, although the Treasury was unable to say what proportion would see an improvement to their overall situation.
But the 15 per cent of investors with a portfolio worth upwards of £140,000 will have to stump up more.
“This simpler system will mean that only those with significant dividend income will pay more tax,” Osborne said. “Investors with modest income from shares will see either a tax cut or no change in the amount of tax they owe.”
Not everyone was pleased with the measure.
Mark Abbs, partner at Blick Rothenberg, said: “Discouraging entrepreneurial activity and enterprise by increasing the tax on dividends is the wrong thing to do at a time when we need the Government to be doing everything it can to support and incentivise the small businesses that are the powerhouse of the UK economy.”
This article has been updated to clarify that only pensioners will benefit from the changes.