Rumour has it that Chancellor Jeremy Hunt is considering halving the tax-free dividend allowance and increasing dividend taxes in his Autumn Statement on 17 November 2022. If that’s the case, who will be affected and how?
Dividends briefly explained
Dividends are tax-efficient payments made to company shareholders out of a company’s profits, after Corporation Tax has been deducted. Many limited companies choose to draw money from their businesses this way.
Companies don’t pay tax on any dividend payments issued to shareholders. But, as dividends are classed as income, individual shareholders may have to pay tax on them via Self Assessment. Dividend tax rates as they stand presently for 2022/2023 are:
- 8.75% for basic-rate taxpayers.
- 33.75% for higher-rate taxpayers.
- 39.35% for additional-rate taxpayers.
The tax-free dividend allowance is currently £2,000 in this tax year, which counts in addition to the tax-free personal allowance of £12,570.
What changes might be implemented?
Financial experts are speculating that the Chancellor may raise dividend taxes by a 1.25 percentage point increase for each tax bracket to help plug the £50 billion gap in public finances.
Hunt may also halve the tax-free dividend allowance, reducing it to £1,000. Such a move is predicted to raise £455 million over the next tax year.
What would the suggested dividend tax changes mean?
Should the government take this move, many small businesses will feel squeezed.
Millions of company directors, PSC contractors and entrepreneurs pay themselves using dividends. So an increase in taxation will not go down well with this group. According to one calculation, the 1.25% point hike, the dividend allowance cut and the planned Corporation Tax rise due in April 2023 could mean that some limited companies face a total tax rate of 50.31%.
The dividend tax changes will affect anyone who already has to pay tax on dividends, including investors. And it’ll likely affect a whole new group of people who have so far avoided paying dividend tax because their payout falls within the limits of the current dividend allowance.
Is this strategy set in stone?
No. The changes to dividend tax are just rumours at the moment, and no decisions have been confirmed. But we do know that the dividend tax policy is up for discussion at the Treasury, to this effect.
Hunt himself has warned of a ‘tough road ahead’ and ‘eye-watering’ choices that will have to be made. This came after the recent news that the UK economy contracted by 0.2% in quarter three. For now, all small businesses can do is await the Autumn Statement 2022 – and prepare themselves for a bumpy ride.