Dividend tax increase to cost company directors and retail investors £600m

Laura Suter
7 September 2021

•    1.25% Dividend tax hike designed to spread the pain of NI increase
•    Move will raise £600m from investors and self-employed
•    Likely to hit company directors more than retail investors
•    Highlights the importance of tax wrappers such as ISAs and pensions

Laura Suter, head of personal finance and AJ Bell, comments:

“The dividend tax hike looks very much like a last-minute policy addition positioned as spreading the pain of tax increases across society. Investors and the self-employed will collectively pay £600m more in tax as a result of the move. However, it will be felt the most by company directors, including the self-employed and contractors, who pay themselves via company dividends in addition to salary. The move means that anyone taking home more than £2,000 a year in dividends will now face a slightly higher bill. At £10,000 of dividends this equates to £100 a year more, regardless of your tax bracket, while at £20,000 a year it means an extra cost of £225.

“Retail investors will only be impacted if they have significant portfolios outside of a pension or ISA as these shelter dividends from tax.  Even then, they will only be caught and face a higher tax bill if their annual dividends are over the annual dividend allowance of £2,000.  To be in that position you’d have to have a portfolio of over £50,000 if it was yielding 4% a year and the Government estimates that around 60 per cent of people who have dividend income outside of ISAs will not see a tax increase next year.

“Those who receive dividend income have faced a series of tax hikes in recent years, with the tax-free dividend allowance being slashed by 60% from £5,000 to £2,000 in 2018 and a rise in tax rates before that. These successive moves means it’s never been more beneficial for investors to put their money in ISAs or pensions and with generous £20,000 and £40,000 annual limits respectively, investors can start shielding money from the taxman right away.”

Dividend tax rate changes:

Tax band

Current dividend tax rate

New dividend tax rate

Basic rate

7.5%

8.75%

Higher rate

32.5%

33.75%

Additional rate

38.1%

39.35%

Impact of the dividend tax increase on annual dividends of £5,000, £10,000 and £20,000 in different tax bands: 

Tax band

Tax paid on £5,000 dividend at current rate

Tax paid on £5,000 dividend at new rate

 

Basic rate

£225

£263

 

Higher rate

£975

£1,013

 

Additional rate

£1,143

£1,181

 

         
         

Tax band

Tax paid on £10,000 dividend at current rate

Tax paid on £10,000 dividend at new rate

 

Basic rate

£600

£700

 

Higher rate

£2,600

£2,700

 

Additional rate

£3,048

£3,148

 

         
         

Tax band

Tax paid on £20,000 dividend at current rate

Tax paid on £20,000 dividend at new rate

 

Basic rate

£1,350

£1,575

 

Higher rate

£5,850

£6,075

 

Additional rate

£6,858

£7,083

 

         

Laura Suter
Head of Personal Finance

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

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