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Chancellor abolishes top dividend tax in biggest uproar in years – what does this mean for investors?
- Chancellor Kwasi Kwarteng unveiled his mini Budget this morning
- He has abolished the top dividend tax rate to align with the top rate
- Retail investors will only see a benefit if their annual dividend is over £2,000
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Kwasi Kwarteng today unveiled its mini-budget that includes a series of tax cuts in an effort to stimulate the economy.
As part of a package of tax cuts not seen since 1972, the Chancellor has abolished the top rate of dividend tax to bring it in line with the existing maximum rate of 32.5 percent.
Kwarteng lamented the lack of growth in the economy and said his new measures would end a “vicious circle of stagnation.”
Chancellor Kwasi Kwarteng abolishes top dividend tax rate as part of package of measures to stimulate the economy
As a result, he has abolished the additional dividend tax rate, currently 39.35 percent, to be in line with the high rate of 32.5 percent next year.
It comes on top of previously announced plans to scrap the 1.25 percent hike announced last year by former Chancellor Rishi Sunak.
Last October, Sunak increased the income tax rates applicable to dividend income by 1.25 percent, raising the normal rate to 8.75 percent and the higher rate to 33.75 percent.
This means that the taxpayer will again pay 7.5 percent from April next year.
Quarter’s approach to tax cuts has been criticized for helping only the wealthy, especially as the energy crisis continues and inflation rises.
The abolition of the top 45p income tax rate has come under fire for disproportionately helping higher income earners.
| Dividend Level | Tax savings between 22/23 and 23/24 |
|---|---|
| £2,000 | £0 |
| £5,000 | £206 |
| £10,000 | £548 |
| £20,000 | £1,233 |
| £30,000 | £1,918 |
| £50,000 | £3,288 |
| Source: AJ Bell. Figures compare tax year 2022/23 and the 1.25% surcharge on dividend tax rates with the planned system of 2023/24, in which the surcharge rate is abolished and higher earners pay a maximum of 32.5% dividend. | |
The Resolution Foundation think tank said half of Kwarteng’s planned tax cuts will go to the richest five percent of the country.
Reducing the top dividend tax rate will also only help those who make more than £150,000.
‘This one [cut] means an 18 percent reduction in the tax rate that these investors and business leaders will pay,” said Laura Suter, chief of personal finance at AJ Bell.
“However, it will be felt most by business leaders, including the self-employed and contractors, who pay themselves through corporate dividends in addition to salary.”
Someone who receives £10,000 in dividends a year will save £548, while those who receive £50,000 will save over £3,000.
Daily investors will only see a benefit if their annual dividend exceeds the £2,000 fee. Someone who receives £5,000 in annual dividends will save £206 a year.
And for investors who put their money into retirement or Isa, they will see little benefit because they protect dividends from tax.
The government said the move will “support entrepreneurs and investors in the UK to boost economic growth”.
While investors will see the tax hike on dividends reversed, they won’t see it until April next year, meaning they’ll see another year of higher rates until then.
According to the growth plan document, the move will benefit 2.6 million dividend taxpayers with average savings of £345 in 2023-24.
Alison Hill, tax partner at PwC, says: “The reversal of the 1.25 percent increase in the dividend tax rate from 2023, intended to boost the supply side of the economy, will benefit every taxpayer who receives dividends and means double incentive for any additional rate taxpayers who fall into that category.’