Taxes on share dividends will be raised by 1.25%
Boris Johnson has announced his government will implement a £12bn per year package of tax increases starting from next April to combat NHS Covid backlogs and overhaul social care.
On Tuesday morning the cabinet agreed to a 1.25% increase in national insurance contributions, which will be levied on employers and employees.
Taxes on share dividends will also be raised by 1.25%, which is expected to bring £600m into government coffers.
The revenue will go towards reducing NHS waiting lists, with social care expected to receive £5.3bn of the £36bn to be raised in the next three years.
Laura Suter, head of personal finance and AJ Bell, believes the dividend tax hike is likely to hit company directors more than retail investors.
“The dividend tax hike looks very much like a last-minute policy addition positioned as spreading the pain of tax increases across society,” Suter says.
“Investors and the self-employed will collectively pay £600m more in tax as a result of the move. However, it will be felt the most by company directors, including the self-employed and contractors, who pay themselves via company dividends in addition to salary.”
“The move means that anyone taking home more than £2,000 a year in dividends will now face a slightly higher bill. At £10,000 of dividends this equates to £100 a year more, regardless of your tax bracket, while at £20,000 a year it means an extra cost of £225.”
Retail investors will only be impacted if they have significant portfolios outside of a pension or ISA as these shelter dividends from tax.
“Even then, they will only be caught and face a higher tax bill if their annual dividends are over the annual dividend allowance of £2,000. To be in that position you’d have to have a portfolio of over £50,000 if it was yielding 4% a year and the Government estimates that around 60 per cent of people who have dividend income outside of ISAs will not see a tax increase next year.”