Dividends have become an increasingly important part of income for many investors, business owners, and retirees alike.

With the Treasury’s finances under significant pressure, there’s speculation that dividends could be targeted in the upcoming Budget.

Our latest blog explores some ‘what ifs’ to consider the potential impact.

Currently, dividend income is taxed at different rates depending on your income tax band. 8.75 per cent for basic-rate taxpayers, 33.75 per cent for higher-rate taxpayers, and 39.35 per cent for additional-rate taxpayers.

However, with these rates already close to matching Income Tax rates for higher and additional-rate taxpayers, there’s limited room for manoeuvre.

Increasing these rates further could make dividends less attractive as a source of income, particularly for those who rely on them heavily, such as business owners and investors.

The Government will likely tread carefully here, as taking more of investors’ returns as tax could discourage investment in the UK stock market, which Labour is keen to bolster.

Another potential change could involve the dividend allowance, which has already been cut down drastically by the previous Government, going from £5,000 to the current £500.

The big question is whether Labour is prepared to go any deeper.

There’s speculation that the allowance could be slashed further, perhaps to £250, but this would be an incredibly unpopular move among investors.

HMRC is expected to collect £17.5 billion from dividend tax in the current tax year, so it’s already a meaningful source of revenue.

However, further reducing the allowance might be seen as ‘shooting itself in the foot,’ as it could discourage the very investment Labour wants to promote in the UK stock market.

Business owners who take dividends from their companies as part of their income could be particularly impacted if the Government decides to tighten the rules around dividend taxation.

For instance, there could be new restrictions on the timing and amount of dividends that can be paid out, or changes to the tax treatment of dividends in closely held companies. These measures could make it less tax-efficient to extract profits from a business via dividends, leading some to reconsider how they draw income from their businesses.

One of the reasons dividends are attractive is that, even after recent increases, the tax rates on dividends are still lower than Income Tax rates.

However, if Labour were to further reduce or eliminate this differential, it would diminish the tax advantage of receiving income as dividends instead of salary.

While this might seem like a straightforward way to raise revenue, it risks undermining the incentive for investment and growth, which Labour aims to encourage.

These ‘what ifs’ highlight the potential changes to dividend taxation that the Autumn Budget could bring.

Whether it’s higher tax rates, a reduced allowance, or tighter rules for business owners, these changes could significantly impact how dividends are used as a source of income.

As we approach 30 October, it’s important to stay informed and consider how these potential changes might affect your financial planning.

For assistance and guidance in light of the upcoming Budget, please get in touch with your Seymour Taylor representative or contact us on enquiries@stca.co.uk 01494 552100.

This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at time of publishing on 22 October 2024.

Posted in Blog news.