‘Bitter blow’ for small firms after heavy cut to dividend allowance

RETIREES, investors and company owners who pay themselves using dividends have been dealt a blow after the Government announced a 75 per cent cut to the tax-free allowance.

Jeremy Hunt, the Chancellor, said the dividend allowance would be cut in stages. It will halve in April from £2,000 to £1,000, and will be cut again to £500 from April 2024. Analysts said millions more would be dragged into paying the tax.

This will raise £940 million for the Exchequer by the 2027-28 tax year, officials said.

Pensioners who rely on dividends for income in retirement, investors holding shares outside an Isa and company owners who pay themselves via dividends will be hit by the change.

The first cut in the dividend tax threshold to £1,000 will trigger an extra £337.50 bill for a higher-rate taxpayer, according to wealth manager Quilter. The second cut, from April 2024, will cost them £506.25 more compared with today.

For a basic-rate taxpayer, who pays tax on dividends at 8.75 per cent rather than 33.75 per cent for higher-rate taxpayers, the extra bill in April 2024 will be £123.75. An additional-rate taxpayer will be liable to pay £590.25 more.

Martin Mctague, of the Federation of Small Businesses, said the cut to the dividend allowance was a “bitter blow” for the owners of small limited companies.

The threshold cut follows a 1.25 percentage point increase in dividend tax rates that was introduced in April 2022.

Laura Suter, of stockbroker AJ Bell, said: “The move to slash the tax-free dividend allowance will drag millions more into paying the tax. Currently anyone with less than £2,000 of dividends a year pays no tax on that money, but in two years’ time even those earning just over £500 in dividends a year will have to pay dividend tax.”

Ms Suter warned the tax would harm company directors and discourage entrepreneurs from starting new businesses.

She said: “This move will mean some company directors reassess whether there is a tax benefit to running their own business, which doesn’t exactly play into the Government’s hands of boosting GDP and creating more homegrown businesses.”

Susannah Streeter, senior investment and markets analyst at investment firm Hargreaves Lansdown, said there was a risk that the Government may end up receiving less in tax because investors hoard assets. She said: “Those people who have diligently invested over the long term to build up their financial resilience will no doubt feel unfairly swiped by this grab from profits.”