Millions of savers will lose £315 in raid on dividends

MILLIONS of ordinary savers will be stung by a £2.3 billion tax raid on the dividends they receive from shares.

Figures show that a fifth of those affected by a £3,000 cut to the tax-free allowance on dividends will be the over-65s, who have spent years saving for their retirement.

Critics said the move – which was aimed at wealthy individuals trying to pay less tax – would instead deal a hammer blow to middle-class investors.

Currently savers can receive up to £5,000 each year tax-free from dividends, which are essentially regular payments made to shareholders. Typically they are made two times a year to those who hold shares in big firms.

But the Government believes wealthy individuals are exploiting the allowance by setting up companies and paying themselves their income as dividends. This allows them to get an extra tax-free allowance and pay a lower rate of tax.

At the moment, the first £5,000 in dividends is tax free, but from April 2018 the allowance will be cut to £2,000. It means around 2.27million individuals will have to pay an extra £315 in tax a year on average.

While the crackdown should prevent the self-employed from using sophisticated company structures to lower their tax bills, it will also deal a hammer blow to hundreds of thousands of ordinary investors.

Figures in the Budget documents show that one in five of those affected by the raid on dividends are aged over 65.

Many will have diligently saved for their retirement in shares that pay regular dividends and now face losing as much as a £1,000 a year.

With interest rates on cash savings hitting record lows, many savers have also transferred their nest eggs into shares as a way of boosting their income. They rely on the dividends from these shares as an income.

Last night experts said Philip Hammond had missed his target with the tax raid. Jason Hollands, of wealth management group Tilney, said: ‘It’s a further squeeze on middle class investors who have worked hard all their life for their money. The aggres- sive cut was clearly aimed at employees and directors of small businesses yet it will also hurt investors.’

Chris Sanger, of accountancy giant EY, said: ‘This will be a bitter blow for those who are relying on savings to fund their retirement and who now find themselves as collateral damage.’

The £5,000 tax-free allowance was introduced last April by George Osborne in a bid to simplify the way dividend tax is paid.

After the first £5,000 a year, basicrate taxpayers pay 7.5 per cent on any additional dividend earnings. Higher earners pay 32.5 per cent and additional earners 38.1 per cent.

When the allowance drops to £2,000, basic rate taxpayers who continue to receive £5,000 in dividends will have to pay an extra £225 in tax, according to accountancy firm Deloitte.

Budget documents said 80 per cent of general investors will not be affected. But figures from the Office for Budget Responsibility show the Treasury will net a £2.3 billion from the move by 2021-2022. Savers are being urged to move investments inside taxfree Isas to reduce their tax bill.

PHILIP Hammond has announced the threshold for tax-free ISAs is going up from just over £15,000 to £20,000 – an increase of £4,760.