Personal Account

The Tories are taxing dividends because the public think they are a dirty word – but they power ordinary savers, not fat cats

The Government’s dividend tax rise this week had all the hallmarks of a last- minute decision. As the clock ticked down towards the announcement of its package of measures to tackle the social care crisis, it turned to the trusty whipping boy of the nation’s personal and corporate finances.

For a party which professes to believe in low taxes, the Conservatives are finding it hard to kick an addiction to raising dividend duties. This week’s increase was the third in six years, following rises in 2015 and 2017. A 1.25 percentage point increase to dividend tax rates across the board will raise £600m, tiny in comparison to the £12bn the Government is raising for its social care measures.

It is dwarfed by money that will flow into the Treasury from the same 1.25 percentage point rise in National Insurance rates.

As a result of the changes, the tax rate on dividends, after the £ 2,000 dividend tax- free allowance, will rise to 8.75pc for basic-rate taxpayers, 33.75pc for those paying higher rate tax and 39.35pc for additional rate payers. But like the levying of National Insurance on working pensioners, the dividend tax rise smacks of an effort to keep up appearances.

Its contribution to funding the country’s social care bill is minute. However, it helps the Government argue it is spreading the pain of tax increases across society.

I suspect there’s another line to the Government’s thinking.

Dividends are seen in some quarters as the preserve of “fat cats”, providing a gift to Whitehall in the form of a revenue raiser free from the opprobrium that would normally accompany a raid on the finances of ordinary people. But they are not.

Dividends are relied upon by the selfemployed and contractors, as well as ordinary investors and pension savers. They oil the wheels of pension funds and life insurance policies, helping savers put away money for retirement.

And yet dividends have come under sustained attack. Back in 2015, the then chancellor George Osborne raised rates by 7.5 percentage points, though this was softened by the introduction of a £5,000 tax-free allowance. That limit, however, only lasted two years, before it was cut to the current £2,000 level.

The latest tax rise comes at an exceptionally poor time for investors who suffered a severe drop in their income last year as companies cut dividends.

Payments from British stock market companies have only just started to recover, helping to restore a dividend culture that is unrivalled, and the envy of investors around the world. These payouts from London-listed firms are not the preserve of shadowy institutions. The beneficiaries are to a large degree savers who own their shares through company pensions, and DIY investors.

The fact that the majority of DIY investors will escape the impact of the dividend tax rise by holding their shares in Isas, which are sheltered from the duty, is welcome.

But the worrying aspect of the rise is it signals a government that believes dividends have become a dirty word.

‘The latest tax rise comes at an exceptionally poor time for investors after companies cut payouts’