Investors hit by £4bn dividend crackdown

The rates will rise to 8.75pc for basic-rate taxpayers, 33.75pc for higher-rate payers and 39.35pc for additional-rate taxpayers.

There is an annual tax-free allowance for dividends of £ 2,000. The figure was cut from £ 5,000 three years ago.

Before 2016, there was no dividend allowance but basic-rate taxpayers were exempt from tax on dividends. Dividend tax took effect at a lower rate of 25pc for those who earned more than the higher-rate tax threshold, which was £ 42,386 at the time, and at 30.56pc for additional-rate payers – those who earned more than £ 150,000.

The increasingly harsh tax treatment of investors means a higher-rate taxpayer who earns £ 30,000 in dividends today will pay £ 1,950 more in tax from April than they did in 2015. A basic-rate taxpayer who earns £ 5,000 of dividends a year would have paid nothing before 2016 but will pay £ 263 from next month.

Ms Suter said a large number of people would be caught. “While the annual Isa allowance now is a very generous £ 20,000, it hasn’t always been that way. Just over 10 years ago it was £ 7,200 and only in 2017 did it leap to the current limit.

“This means it’s very possible that people would have built up other investments and, coupled with investment growth, could now have a sizeable pot outside an Isa,” she said.

The dividend tax rise comes at the same time as a 1.25 percentage point increase in National Insurance rates, which will increase workers’ NI bills by 10pc or more. This tax rise on wages will add hundreds of pounds to annual bills and cost workers £ 12bn a year. But there are ways to beat the squeeze. The simplest is to make use of the annual Isa allowance. These tax-free accounts protect savings from income, dividend and capital gains taxes.

Ms Suter said investors should rank their holdings by the dividends they paid in pounds and pence. “They should then work through the list, shifting the highest-yielding investments into the Isa first,” she said.

Alternatively, married couples and civil partners can transfer assets between them free of tax, allowing each to make the most of their annual Isa allowance and double their protection.

Other options include moving money into riskier but more tax-efficient investments such as venture capital trusts, which invest in fledgling firms. Any dividends earned from the investments are tax-free and purchases of newly issued VCT shares qualify for 30pc income tax relief.


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