Chancellor Rachel Reeves is reportedly considering upping dividend tax as part of her plans to address the country’s ailing finances, in a move that would hit low-income investors hard, data from IG has found.
At present, basic rate taxpayers are charged 8.75% on any dividend income above £500, while higher rate earners pay 33.75% and those on the additional rate pay 39.35%.
Earlier this month, independent think-tank The Resolution Foundation said the basic rate of dividend tax should be increased at least to 16.5%.
However, even a 4 percentage point increase to 12.75% could increase costs significantly, said trading platform IG. Based on dividend income received in 2022/23, the firm calculated that some 3.2 million basic-rate taxpayers would be hit with an additional £380 annual tax bill. This rises to £500 by 2029/30, according to forecasts from the Institute for Fiscal Studies.
Some £70.5bn was raked in from dividend income outside of tax-free wrappers in the 2022/23 tax year (the most recent data available from HMRC), £30bn of which was received from the lowest tax bracket.
Michael Healy, UK managing director at IG, said: “Dividend tax changes might look like a quick and painless way to raise revenue, but an increase will hurt millions of people and undermine the government’s own ambition to build a nation of investors.
“At a time when households are trying to grow their wealth and the UK stock market needs long-term capital, now is the worst possible moment to make investing in UK stocks less attractive.”
The number of people paying the tax is increasing. A freedom of information request by Quilter earlier this year revealed the number of investors forecast to pay the tax has soared to 3.7 million for the 2024/25 tax year, as Trustnet reported in August.
Dan Coatsworth, head of markets at AJ Bell, said this comes at a time when the allowance has already been “cut to the bone”, having been reduced from £2,000 to £1,000 in April 2023 and halved again to £500 in April 2024.
The “nuclear option” is to abolish it completely, or to raise the lower rate. Either “would be negative for investor sentiment”, he warned.
“Reeves needs to tread carefully, given her desire to encourage more people to invest in the stock market," Coatsworth said. "There is a risk that tweaking the system could backfire and discourage investment rather than drive more money into financial markets.”