Jeremy Hunt slashes dividend allowance in blow for investors

Autumn Statement: Jeremy Hunt outlines plans for windfall taxes

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Chancellor Jeremy Hunt today announced his plan to cut the dividend allowance from £2,000 to £1,000 next year. On top of this, the tax-free dividend limit will be further slashed to £500 as of April 2024 under current plans. These tax changes were announced as part of Mr Hunt’s Autumn Budget and will primarily affect those with shares.

How are dividends taxed?

Shareholders in companies are entitled to a distribution of profits, which is known as a dividend.

No tax needs to be paid on any dividend income that falls within someone’s Personal Allowance, which is the amount of income a person can earn each year without paying tax.

Taxpayers also get a dividend allowance each year and they only pay on any income above the threshold.

It should be noted that no tax needs to be paid for dividends which originate from shares in an ISA.

What is the dividend allowance?

Originally, the dividend allowance was introduced by the Government to help people save in 2017. The dividend allowance began at £5,000, but it has been frozen at £2,000 for the past five years.

Despite this, the £2,000 allowance covered the majority of an individual savers’ dividend income. As a result of Mr Hunt’s decision to cut the allowance, more people will pay tax on their dividends.

How much are you taxed on dividends?

The amount of tax someone pays on dividends above the allowance is dependent on their income tax bracket. For example, basic rate taxpayers pay 8.75 percent dividends over the allowance, while higher rate taxpayers pay 33.75 percent.

Anyone in the additional rate tax band pays 39.35 percent. In order to determine someone’s tax band, they need to add their total dividend income to any other income.

Shaun Moore, a financial planning expert at Quilter, broke down how people will be affected by this drastic tax change.

Mr Moore said: “For a basic rate taxpayer, the reduction in the dividend allowance to £1,000 will mean they will end up paying £87.50 more in tax.

“Similarly, if you are a higher rate taxpayer this rises to £337.50 more in tax and £393.50 if you are an additional rate taxpayer.

“From April 2024, a basic rate taxpayer will pay £123.75 more, increasing to £506.25 and £590.25 for a higher rate and additional rate taxpayer respectively.”

The tax expert also highlighted ways in which savers can avoid paying an excessive amount of tax following the dividend allowance cut.

He added: “To avoid paying more tax than is necessary on dividends, you should ensure you are making use of all available tax shelters, such as the generous £20,000 ISA allowance.

Mr Hunt has chosen to halve the tax-free allowance, cutting it from £12,300 to £6,000, with it set to drop further to £3,000 in April 2024.

“You can also make use of the children’s Jisa allowance which is set at £9,000 annually.”

Outside of this, the Chancellor also confirmed plans for the annual exemption for capital gains tax.

Mr Hunt has chosen to halve the tax-free allowance and halved it from £12,300 to £6,000, with it set to drop to £3,000 in April 2024.

These tax rises are part of the Government’s wider plan to balance the books following the pandemic and amid the cost of living crisis.

The pending changes to the dividend tax allowance will be implemented from April 2023.

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