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  • Writer's pictureNoel Aloko

Autumn Statement 2022: dividend tax allowance cut to £1k

From April 2023, the dividend tax allowance will be halved to £1,000 from the current £2,000 with a further cut to follow

The dividend allowance will be halved to £500 from April 2024. This measure is expected to raise £450m in 2024-25 and then a further £810m in 2025-26, with the total impact estimated at £3bn cumulatively by 2028. Introduced in April 2016, the dividend allowance was initially £5,000 but reduced to £2,000 from April 2018, so reducing this further will erode the value of the allowance over time. Taxpayers with dividend income have also been impacted by the change to dividend tax rates from April 2022, which increased by 1.25% to deter taxpayers from using dividends to avoid the increased National Insurance rates and anticipated Health and Social Care Levy. Although this was abolished for employers and employees, the rise remains in place for dividends. Rachel McEleney, associate tax director at Deloitte, said: ‘This will result in additional income tax of up to £88, £338 or £394 for basic, higher and additional rate taxpayers, respectively in 2023/24. These amounts will increase to £131, £506 and £590 in 2024/25. The government expects this to raise over £3bn over the next five years.’ ICAS head of tax Chris Campbell said: ‘For those dividends not covered by the dividend allowance, income tax rates on dividends will continue to be 8.75% for dividends within the UK basic rate band, 33.75% for dividends within the UK higher rate band and 39.35% for dividends within the UK additional rate band. The taxation of dividends is not devolved, so the UK dividend rates apply throughout the UK.’ Faye Church, chartered financial planner, Investec Wealth & Investment said: ‘For business owners who have the flexibility to pay an income via salary or dividends, it may be worth re-assessing whether dividends are the still the most effective way of receiving an income from your business. ‘For income investors, it may be more attractive to look at corporate and government bonds as a replacement for equity income. With recent moves in interest rates and the cut in dividend allowance, fixed income investments are potentially looking more attractive.’

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