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.”