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Highest rate of dividend tax is abolished in biggest shake-up in years

Chancellor Kwasi Kwarteng has scrapped the top dividend tax rate as part of a package of measures to boost the economy

Chancellor scraps highest dividend tax rate in biggest system shake-up in years – what does it mean for investors?

  • Chancellor Kwasi Kwarteng unveiled his mini budget this morning
  • It scrapped the top dividend tax rate to bring it into line with the top rate
  • Retail investors will only see an advantage if their annual dividends exceed £2,000

Kwasi Kwarteng today unveiled its mini budget with a series of tax cuts in a bid to boost the economy.

As part of a tax reduction package not seen since 1972, the Chancellor abolished the top rate of tax on dividends to bring it in line with the existing top rate of 32.5%.

Kwarteng lamented the economy’s lack of growth, saying his new measures would end a “vicious circle of stagnation”.

Chancellor Kwasi Kwarteng has scrapped the top dividend tax rate as part of a package of measures to boost the economy

Chancellor Kwasi Kwarteng has scrapped the top dividend tax rate as part of a package of measures to boost the economy

As a result, it scrapped the additional dividend tax rate, currently 39.35%, to match the top rate of 32.5% next year.

This comes on top of previously announced plans to scrap the 1.25% increase announced last year by former Chancellor Rishi Sunak.

Last October, Sunak raised the income tax rates applicable to dividend income by 1.25%, bringing the ordinary rate to 8.75% and the top rate to 33.75%.

This means that taxpayers at the basic rate will again pay 7.5% from next April.

Kwarteng’s approach to tax cuts has been criticized for only helping the wealthy, especially as the energy crisis continues and inflation rises.

The abolition of the top 45p rate of income tax has been criticized for disproportionately helping high earners.

SAVINGS FOR ADDITIONAL RATE TAXPAYERS
Dividend level Tax savings between 22/23 and 23/24
£2,000 £0
£5,000 £206
£10,000 £548
£20,000 £1,233
£30,000 £1,918
£50,000 £3,288
Source: AJ Bell. The figures compare the 2022/23 tax year and 1.25% surcharge on dividend tax rates with the planned 2023/24 system, where the additional rate is removed and high earners pay a rate maximum dividend of 32.5%.

The Resolution Foundation think tank said half of the tax cuts planned by Kwarteng would go to the top 5% in the country.

Reducing the top dividend tax rate will also only help those earning over £150,000.

‘This [cut] represents an 18% reduction in the tax rate these investors and entrepreneurs will pay,” says Laura Suter, personal finance manager at AJ Bell.

“However, it will be felt most by business owners, including freelancers and entrepreneurs, who pay themselves via company dividends in addition to salary.”

Someone who receives £10,000 in dividends a year will save £548 while those who receive £50,000 will save over £3,000.

Ordinary investors will only see a benefit if their annual dividends exceed the £2,000 allocation. Someone who receives £5,000 in annual dividends will save £206 a year.

And for investors who put their money into their pension or Isa, they will see little benefit as they shelter the dividends from tax.

The government said the move will “support entrepreneurs and investors across the UK to drive economic growth”.

While investors will see the dividend tax hike reversed, they won’t see it until April next year, meaning they’ll still have to deal with a year of higher rates until then. .

According to the growth plan document, the move will benefit 2.6 million dividend payers with an average saving of £345 in 2023-24.

Alison Hill, Tax Partner at PwC, says: “Cancellation of the 1.25% increase in the dividend tax rate from 2023, designed to stimulate the supply side of the economy, will benefit any taxpayer receiving dividends and represents a double boost for all additional rate taxpayers who fall into this category.

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