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6 November 2024
For years, dividends have been a reliable income source for business owners, investors, and retirees.
However, with the Government scrambling for ways to fill the economic gap, could we see changes to dividend taxes in the Budget?
Where things stand now
At the moment, dividend tax rates depend on which Income Tax band you fall into:
Alongside these rates, there is a £500 tax-free dividend allowance, but only for investments outside of ISAs or pensions.
Dividends within those tax-sheltered accounts enjoy total tax exemption, no matter how much you earn.
With Budget Day approaching, some speculate that the dividend allowance could be slashed again or scrapped altogether.
If that happens, the Government might defend the move as a measure aimed at wealthier individuals, many of whom already take full advantage of ISAs and pension tax perks.
A shrinking safety net
Under the previous Government, the dividend allowance was cut from £5,000 to the current £500, a steep drop in just a few years.
While another reduction would not come as a massive surprise, it would not be a welcome change either.
For the Government, though, it might seem like an easy way to shore up public finances without causing too much uproar.
How could this affect business owners and investors?
For business owners, dividends are often the most tax-efficient way to take money out of their companies.
If the Government increases dividend taxes, it could force a rethink on how they extract profits.
We might even see new limits on how dividends are paid or taxed, which could make them a less attractive option.
Investors holding shares outside of ISAs and pensions would also feel the pinch.
Without the dividend allowance, these investors could be hit with higher tax bills – and potentially Capital Gains Tax (CGT) when they sell their shares.
The combination of these taxes could make general investment accounts a lot less appealing.
What would happen if the dividend allowance disappears?
If the dividend allowance were to drop to just £250 or be scrapped entirely, the benefits of holding investments outside of ISAs or pensions would become even more limited.
Investors who have maxed out their tax-free savings in ISAs and pensions would be left facing steeper tax bills on their dividend income.
This could dampen enthusiasm for investing in UK companies, a concern the Government would need to consider.
Contact us today for further expert advice from our team on how the Budget might affect dividend tax.
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