The UK government could turn to raising dividend tax, an investment platform has warned, after Sir Keir Starmer warned of a “painful” Budget in October.
“The previous government had already cut the dividend allowance to the bone, going from £5,000 to the current £500,” said Dan Coatsworth, investment analyst at AJ Bell. “The big question is whether Labour is prepared to go any deeper.
“HMRC is expected to collect almost £18bn from dividend tax in the current tax year, so it is already a meaningful source of revenue. While slashing the allowance, perhaps to £250, cannot be ruled out, the new government would be incredibly unpopular with investors if it reduced the dividend allowance any further.”
Dividend allowance history
Tax years | Dividend allowance |
6 April 2024 to 5 April 2025 | £500 |
6 April 2023 to 5 April 2024 | £1,000 |
6 April 2018 to 5 April 2023 | £2,000 |
6 April 2016 to 5 April 2018 | £5,000 |
Another option, Coatsworth said, would be to raise the rate of dividend taxation. “Although there’s only so much room for manoeuvre, with tax rates on dividends already very close to matching income tax rates for higher and additional rate taxpayers,” he added.
“The government will likely tread carefully here. Labour wants to encourage investment into the UK stock market and create a more vibrant place for British businesses to access growth capital. Therefore, taking even more of investors’ returns as tax would mean shooting itself in the foot.”
Income tax band | Tax rate on dividends over the allowance |
Basic rate | 8.75% |
Higher rate | 33.75% |
Additional rate | 39.35% |
A freedom of information request by AJ Bell found that the number of people expected to pay dividend tax in the 2024-25 tax year is almost double since 2021-22. Nearly 3.6mn taxpayers are expected to incur tax on dividend income this year, with the Treasury set to receive almost £18bn.
Analysis of HMRC figures by AJ Bell also found that nearly a fifth of higher rate taxpayers will pay on average £5,379 in dividend tax this year. Additional rate taxpayers will see an average bill of £32,578.
Although the total tax take has risen, the investment platform noted that the average dividend tax due has fallen across all tax bands, with basic rate taxpayers set to pay an average of £385 this year, compared to £780 in 2021-22.
chloe.cheung@ft.com
