You are here: Home - Investing - Experienced Investor - News -

Investors and company directors could be hit with higher dividend taxes

Written by: Lana Clements
Investors and small business owners who pay themselves through dividends rather than a salary could be hit by another tax raid by the chancellor in the Autumn Budget, experts warn.

Many individuals set up limited companies and receive payments through dividends, rather than a salary. For investors, dividends help them generate income from shares and funds held outside of ISAs and pensions.

It has also become a popular way for investors to receive income from buy-to-let properties following the erosion of landlord tax perks.

Dividend tax changes were introduced last year; before 6 April 2016, dividends were paid with a 10% non-reclaimable tax credit. As such, although the rate of dividend tax was 10% for basic rate tax payers and 32.5% for higher rate tax payers, it was partly covered by the tax credit. After 6 April, the 10% non-reclaimable tax credit was removed.

Earlier this year, the chancellor, Philip Hammond, announced a fresh crackdown, taking the tax-free dividend allowance from £5,000 to £2,000 with effect from April 2018.

Anyone earning dividends above this amount will be taxed at the following rates:

  • Basic rate taxpayer – 7.5%
  • Higher rate taxpayer – 32.5%
  • Additional rate taxpayers and trustees – 38.1%.

At the time of the announcement, the government estimated around 2.27 million individuals would be affected with an average loss of £315. But for higher rate taxpayers, the dividend tax bill is expected to increase by around £1,000, according to analysis.

Dividends targeted again?

Private limited company directors and investors could be set for further tax rises, as the cash-strapped chancellor looks to fund giveaways, such as stamp duty cuts, in the Autumn Budget tomorrow.

Danny Cox chartered financial planner at Hargreaves Lansdown predicts the dividend allowance could be cut even further below the £2,000 limit or the tax on dividends raised higher.

Chris Sanger, head of tax policy at EY, said: “While we saw a reduction in the dividend allowance in the last Budget, the tax was introduced to offset the benefit of working through a company, but the rate was not increased when the corporation tax rate was reduced.”

Sanger believes the chancellor could take a wider look at workers and reform tax for those who are self-employed.

He added: “We could see more clarification on classes of worker for indirect pay arrangements.

“With a review of modern employment practices already underway, this is an area that looks set to see a fundamental review of its tax and social security treatment.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

The savings accounts paying the most interest

It’s time to get your finances in shape, and moving your cash savings to a higher paying deal is a good plac...

Everything you need to know about being furloughed

Few people had heard of ‘furlough’ before March 2020, but the coronavirus pandemic thrust the idea of bein...

The experts’ guide to sorting out your personal finances in 2021

From opting to ‘low spend’ months to imposing your own ‘cooling-off period’, industry experts reveal t...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week