Shock for investors as dividend tax is raised too

SHAREHOLDERS and small business owners were yesterday hit by a shock tax hike on dividends as part of the plan to fund social care and the NHS.

The Prime Minister announced that dividend tax will increase by 1.25 per cent to raise an extra £600million per year.

Boris Johnson said increasing both national insurance contributions and dividend tax ‘will share the cost between business and individuals’.

Higher rate taxpayers will pay an extra £403 per year on average in dividend taxes, while investors who are basic rate taxpayers will pay an extra £150, the Treasury said.

The policy infuriated small business owners, including the self-employed and contractors, who claimed they are being ‘punished’ by the Government’s ‘anti-small business, antistart up’ agenda.

This group often choose to receive some income in dividends when their company makes a profit, rather than taking a large salary, as it is more tax efficient.

Larger shareholders were also hit, leading one critic to label the policy a ‘kick in the teeth’ for prudent savers.

But there was relief for millions of workers as the Treasury confirmed that pension funds will be exempt from the tax hike, shielding retirement savings. The changes nevertheless led to a wave of protests from small businesses and investment groups.

Mike Cherry, chairman of the Federation of Small Businesses, said: ‘Business owners who have done all they can to retain and support their staff during the pandemic are now being punished with a fresh assault on dividend revenue.’

Kitty Ussher, chief economist at the Institute of Directors, said: ‘The surprise new tax on dividends will yet again target small company directors. Incorporated sole traders and other owner-managers, who relied on dividend income, were the only group of workers that were not supported by the Government during the pandemic.

‘This Government has shown through its actions a total lack of understanding of the very real difficulties faced by owners of the smallest businesses in Britain.’

The changes yesterday will push the dividend tax from 7.5 per cent to 8.75 per cent for basic rate taxpayers, who earn between £12,571 and £50,270.

Higher rate taxpayers – those earning between £50,271 and £150,000 – will pay 33.75 per cent on dividends, up from 32.5 per cent.

And those earning over £150,000, known as additional rate income tax

‘Business owners being punished’

‘Were just getting back on their feet’

payers, will now pay 39.35 per cent on dividends, up from 38.1 per cent.

An entrepreneur taking £45,000 per year in dividends will see their tax bill increase by £378, while a small business owner receiving £75,000 in dividends will pay an extra £753.

Shareholders who hold their investments in a tax-free ISA will not be affected as they do not pay tax on dividend income.

And those who invest money outside of the £20,000-per-year ISA allowance are entitled to a tax-free dividend allowance of £2,000.

But two-fifths of those with dividend income outside of ISAs will pay the increased dividend tax despite the allowance, officials said.

Savers have already had a dire year for dividends during the pandemic. Sarah Coles of Hargreaves Lansdown said: ‘Investors have had to crawl through a horrible dividend drought during Covid and were just getting back on their feet.’

Danni Hewson, a financial expert at stockbroker AJ Bell, warned the policy could pave the way for an attack on pensions and ISA allowances.

The Government said over half of the increase in the dividend tax take will come from the richest 10 per cent of households.