On Tuesday (7 September), the prime minister announced a 1.25 percentage point increase in dividend taxes was needed to fund health and social care services.
A health and social care levy will also be introduced alongside this. The tax rise is expected to raise almost £36bn over the next three years, with much of the initial revenue used to clear Covid backlogs.
Lesley Stewart, head of financial planning at Quilter, said the rise in National Insurance (NI) and dividends would bring “unnecessary complexity” for advice firms.
“While many have weathered the pandemic relatively well, the rise in NIs and dividends arguably is likely to be seen as a bit of a kick in the teeth as firms look once again to accelerate growth.”
“From a personal tax perspective, a 1.25% increase on both NICs and dividend income appears to be broadly tax-neutral when comparing the net impact on remuneration options for director or owners of advice firms,” she said.
“From a personal tax perspective, those directors who are remunerated via dividend payments will still pay a low rate of 8.75% at basic rate and 33.75% at higher rate. When compared to income tax and NI these rates still seem attractive. Add to this that NI paid by companies (employers) are also on the rise by the same rate and dividends tend to look even more attractive.”
Katharine Lindley, Chartered financial planner at EQ Investors, said the Conservative government’s move would continue to “narrow the gap” between mainstream income tax rates and the dividend rates.
“The difference between the two rates was looking unsustainable, especially as those with businesses can opt to take lower salaries and more in dividends.”
However, she also said the change will affect working age and pension savers.
“Dividend tax-free allowance of £2,000 looks to continue and, with the £12,570 personal allowance, that removes many from the need to pay any dividend tax, and others should continue to use ISA allowances to wrap income.”
Company directors bear the brunt: Scott Gallacher, Chartered financial planner and director at Rowley Turton, said the increase in dividend tax mainly affects working directors, and was, therefore, a tax on the “UK’s wealth creators”.
“Investors are generally unaffected as we would expect most of their dividend income would be from tax-efficient ISAs or pensions,” he said. “The bright side for advisers is that the dividend tax rise will make company pension contributions even more attractive for our director clients, creating an additional advice need.”
Laura Suter, head of personal finance at AJ Bell, branded the dividend tax hike as a “last-minute policy” 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 most by company directors, including the self-employers and contractors who pay themselves via company dividends in addition to salary.”
She said retail investors will only be impacted if they have significant portfolios outside of a pension or ISA.
“Even then, they will only be caught and face a higher tax bill of 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. The government estimates that around 60% of people who have dividend income outside of ISAs will not see a tax increase next year.”
Suter added 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 mean 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.”
GSI Wealth Management is looking to do a webinar on this very point in the near future, look out for details.
Article by Nafeesa Zaman in the Professional Advisor