Dividends have long been a popular income source, whether you are an investor, business owner, or retiree.
However, with the Government under increasing pressure to find new ways to boost revenue, could dividend taxes be next on the chopping block in the upcoming Budget?
The current state of play with dividend tax and allowances
Right now, how much tax you pay on dividends depends on your income bracket:
There is also a £500 tax-free dividend allowance.
This applies to dividends outside of ISAs or pensions, which already offer tax-free growth.
For anyone with investments within an ISA or pension, there’s no tax on dividends, regardless of the amount.
With the Budget looming, there are rumours that the dividend allowance might face further cuts, or even be scrapped altogether.
Labour could justify this as a move aimed at wealthier individuals who have already made the most of their tax-free options, like ISAs and pensions.
The ever-shrinking dividend allowance
The dividend allowance has not always been so low.
It has been steadily reduced in recent years, plummeting from £5,000 to today’s modest £500.
A further cut would not be a shock, but it could still sting for many investors.
The Government might find such a change politically palatable, positioning it as a necessary step to manage the economy.
What’s at stake for business owners and investors?
For many business owners, dividends are a tax-efficient way to take profits out of their companies.
An increase in the tax rates could drastically impact the way they pay themselves.
We might even see new restrictions on when dividends can be paid or how they are taxed in small businesses, potentially making it less attractive to rely on them.
Investors who hold shares outside tax-protected accounts like ISAs and pensions would feel the brunt of any changes.
They already face potential Capital Gains Tax (CGT) when selling shares, and without the dividend allowance, those holding general investment accounts or share certificates could see their tax bills soar.
The potential impact of reducing or scrapping the dividend allowance
If the dividend allowance were to drop to £250 or vanish entirely, the tax advantages of holding investments outside ISAs or pensions would shrink.
This would hit those who have maxed out their tax-efficient savings options the hardest, leading to higher tax bills on dividends and potentially discouraging further investment in UK companies.
Such a move could make UK businesses less attractive to investors, which Labour would need to weigh carefully given their economic goals.
Need advice on how the Budget could affect your dividend tax? Contact us.
