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Dividend tax increase to cost company directors and retail investors £600m

AJ Bell’s Laura Suter comments on Boris Johnson’s announcement that there will be a 1.25% dividend tax hike

Laura Suter, head of personal finance at AJ Bell, comments:

“The dividend tax hike looks very much like a last-minute policy addition positioned as spreading the pain of tax increases across society. Investors and the self-employed will collectively pay £600m more in tax as a result of the move. However, it will be felt the most by company directors, including the self-employed and contractors, who pay themselves via company dividends in addition to salary. The move means that anyone taking home more than £2,000 a year in dividends will now face a slightly higher bill. At £10,000 of dividends this equates to £100 a year more, regardless of your tax bracket, while at £20,000 a year it means an extra cost of £225.

“Retail investors will only be impacted if they have significant portfolios outside of a pension or ISA as these shelter dividends from tax.  Even then, they will only be caught and face a higher tax bill if their annual dividends are over the annual dividend allowance of £2,000.  To be in that position you’d have to have a portfolio of over £50,000 if it was yielding 4% a year and the Government estimates that around 60 per cent of people who have dividend income outside of ISAs will not see a tax increase next year.

“Those who receive dividend income have faced a series of tax hikes in recent years, with the tax-free dividend allowance being slashed by 60% from £5,000 to £2,000 in 2018 and a rise in tax rates before that. These successive moves means it’s never been more beneficial for investors to put their money in ISAs or pensions and with generous £20,000 and £40,000 annual limits respectively, investors can start shielding money from the taxman right away.”

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