Chancellor Rachel Reeves is set to increase the tax rate on dividends at this year’s Budget, it has been reported, adding to speculation that investors and business owners will be targeted to fill a £30bn fiscal hole.
An increase on basic, higher and additional rates of dividend taces could make up around £2bn in extra revenue, according to a new report in The Telegraph.
Dividends received by individuals are taxed on top income. The current basic rate for returns on shareholdings is 8.75 per cent for Brits on the basic income tax band between £12,571 and £50,27,.
The higher rate on dividends is 33.75 per cent and the additional rate for people on the highest tax band is 39.35 per cent.
The levy was increased by 1.25 percentage points in 2022 under the previous Conservative government.
The Resolution Foundation has called for the basic rate to be hiked to 16.5 per cent but Reeves may consider the move too extreme.
The Telegraph said that a 4 percentage point hike to the levy, coupled with a cut or abolition to the £500 tax-free allowance offered to investors, could be expected to raise nearly £2bn in extra funds. Removing the £500 tax-free allowance would mean even the smallest retail shareholder would have to inform HMRC of their investments.
Reeves could also target revenue generated from assets, the newspaper also reported, fuelling suggestions that landlords and the wealthiest could have to pay more into government coffers.
A Treasury spokesman said it did not speculate on tax speculation.
Dividend tax could backfire
It is the latest report pointing to the government’s tax plans for the Budget.
The first indication of a higher dividend tax rate was made in a Sunday Times report shortly after the Spending Review in June.
Analysts have warned that hiking dividend tax rates could backfire and bring in less cash than expected.
Advisers at St James’s Place said investors would look to revise how they level income and look to pay shareholders through salary.
“For those taking financial advice, this would mean that changes like this can be somewhat mitigated by a change in strategy and therefore possibly not yielding revenue gains for the government,” Claire Trott, head of advice at St James’s Place, said.
Trott also warned that such plans provided may “deter investments in UK businesses” while other analysts warned that HMRC’s tax regime could be further complicated by new changes to dividends taxes.