This particular change involves the dividend allowance, which is the amount someone can make from shares without being levied. People who are shareholders in companies are entitled to a distribution of an organisations’ profits, which is known as a dividend. Taxpayers receive dividend allowance every year and shareholders only need to pay on any income above the threshold.
In his Autumn Statement, Jeremy Hunt confirmed plans to slash the dividend allowance from £2,000 to £1,000 next year.
On top of this, the dividend allowance threshold will be lowered even further to £500 from April 2024.
Originally, the Government introduced the dividend allowance to help savers in 2017 and was initially at £5,000.
Over the past five years, it has been frozen at £2,000 for the past five years but the £2,000 allowance covered the majority of savers’ dividend income.
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Experts are now concerned Mr Hunt’s decision will result in Britons paying more tax on their dividends.
How much someone pays on their dividends over the allowance amount is dependent on their income tax bracket.
The amount of tax someone pays on dividends above the allowance is dependent on their income tax bracket.
Taxpayers on the basic rate pay 8.75 percent dividends over the allowance, while higher rate taxpayers pay 33.75 percent and those on the additional rate tax band pay 39.35 percent.
To determine someone’s tax band, taxpayers must add their total dividend income to any other income.
According to research carried out by Quilter, a basic rate taxpayer will pay £87.50 more tax with the dividend allowance cut next year.
As well as this, higher rate taxpayers will be forced to pay an extra £337.50 more in tax and £393.50 for those who are an additional rate taxpayer.
Basic rate taxpayers will pay £123.75 more from April 2024, with higher and additional rate taxpayers set to pay £506.25 and £590.25, respectively.
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Chris Springett, a tax partner at Evelyn Partners, emphasised why Jeremy Hunt’s latest tax change is a major “blow to investors”.
He explained: “Together with the 1.25 percent increase in dividend tax rates, which was introduced in April 2022, this constitutes a real crackdown on dividends.
“This is a blow to investors who hold assets outside of ISAs and to retirees who rely on dividend income to supplement their pensions.
“It’s yet another reminder to make use of ISAs allowances as a tax-free umbrella for owning investments. Business owners, many of whom pay themselves partially or primarily through dividends rather than salaries, will also be hit.”
Shaun Moore, a financial planning expert at Quilter, shared what shareholders can do to mitigate the damage of Jeremy Hunt’s new stealth tax raid.
He said: “Dividends are a popular way of creating a regular income from investments and therefore reducing the allowance will mean those who rely on dividends for the bulk, or all of their regular income will see this taxed at a much higher level when held outside of a ‘tax wrapper’ such as an Isa or pension.
“To avoid paying more tax than is necessary on dividends, you should ensure you are making use of all available tax shelters, such as the generous £20,000 Isa allowance.
“Furthermore, if you are a higher rate taxpayer, it may make sense to plan as a family and transfer shares to another family member who is in a lower tax bracket. You can also make use of children’s Jisa allowance which is set at £9,000 annually.”