Dividend tax hike is a kick in the teeth for investors

Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on news report that investors and business owners will be subjected to a rise in the rate of the dividend tax.

“Investors and business owners haven’t escaped the clutches of the taxman, who has swept them up in this tax grab, with a 1.25% rise in dividend tax. This will hit anyone holding investments outside an ISA, and people who run their own businesses and pay themselves dividends.

“Investors have had to crawl through a horrible a dividend drought during COVID, and were just getting back on their feet, so this will feel like a particularly nasty attack on their income. Given that so many of them will also have a higher National Insurance bill, it deals them a double blow at a difficult time.

“It means it’s even more important to make sure you shelter as much of your investments as possible in ISAs, where all dividends are completely free of tax. With your money in an ISA, even if the government comes back for more further down the line, your investments are protected from tax.

“For investments held outside an ISA, after the tax-free dividend allowance of £2,000, you will face a higher tax bill. It means it’s worth thinking about the kinds of investments you hold within your ISA. If in any given year you have some investments in an ISA and some outside, it can be a good idea to put high income investments within the tax wrapper, where dividends are tax free. Growth investments outside an ISA could be subject to capital gains tax, but this can be easier to manage and mitigate.

“For business owners, paying themselves in dividends will often still be more tax efficient than paying themselves more income, because even after the change, dividend tax will still be lower than the equivalent income tax. A basic rate taxpayer, for example, will pay 8.75% on dividends over their £2,000 dividend allowance. However, for all those who have struggled through the pandemic, being rewarded for their efforts with a higher tax bill is going to feel like a kick in the teeth.”

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay