Chancellor Rachel Reeves is preparing to target City investors and business owners with a significant increase in dividend taxes, according to new reports.
The move, expected to be announced in the upcoming Autumn Budget, is seen as a key measure to help fill a £30 billion fiscal hole in the government's finances.
What Are The Proposed Dividend Tax Changes?
The Telegraph reports that an increase to the basic, higher, and additional rates of dividend tax could generate approximately £2 billion in extra revenue for the Treasury.
Currently, dividends received by individuals are taxed on top of their income. The existing rates are:
- 8.75 per cent for basic-rate taxpayers (earning between £12,571 and £50,270)
- 33.75 per cent for higher-rate taxpayers
- 39.35 per cent for additional-rate taxpayers on the highest band
These rates were previously increased by 1.25 percentage points in 2022 under the Conservative government.
One potential scenario involves a 4 percentage point hike to the levy, coupled with a reduction or complete abolition of the £500 tax-free dividend allowance offered to investors. Removing this allowance would mean even the smallest retail shareholder would have to declare their investments to HMRC.
Potential Backlash and Wider Implications
Analysts have warned that hiking dividend tax rates could backfire and potentially bring in less revenue than the government anticipates.
Claire Trott, head of advice at St James's Place, explained that investors receiving financial advice would likely adjust their strategies to mitigate the impact.
"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," Trott stated.
She also cautioned that such plans could deter investment in UK businesses, while other analysts warned that HMRC's tax regime could become further complicated by changes to dividend taxes.
The Resolution Foundation think tank has called for even more dramatic measures, suggesting the basic rate should be hiked to 16.5 per cent, though Reeves may consider this too extreme.
Broader Tax Strategy Emerging
This is the latest indication of the government's tax plans for the Budget, following an initial report in the Sunday Times shortly after June's Spending Review.
The Telegraph also suggested that Reeves could target revenue generated from assets, fuelling speculation that landlords and the wealthiest individuals may face higher tax bills.
When approached for comment, a Treasury spokesman maintained their standard position, stating that they do not speculate on tax speculation.
With the Autumn Budget approaching, all eyes will be on the Chancellor to see if these reported plans become reality and how they might reshape investment strategies across the country.
