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Dividend tax rises could significantly affect those who rely on dividend income

Dividend Tax Rises

On 7 September, the government announced its plan to increase National Insurance rates by 1.25 percentage points from the 2022/23 tax year.

Alongside this announcement came plans to also increase Dividend Tax rates by the same amount. This means that investors will pay more tax on any dividends they receive from shares outside of a Stocks and Shares ISA, if they have exceeded the Dividend Allowance of £2,000.

The current Dividend Tax rate for basic-rate taxpayers is 7.5%. This will rise to 8.75% for the 2022/23 tax year. For higher-rate and additional-rate taxpayers, the Dividend Tax rate will rise to 33.75% and 39.35% respectively.

Basic-rate taxpayers and the over-55s might be the worst affected 

Online investment manager AJ Bell have analysed the figures and calculated the cumulative cost of the Dividend Tax changes since 2016.

They found that a basic-rate taxpayer with an annual dividend income of £10,000 would have paid £375 in Dividend Tax during the 2016/17 tax year. In the 2022/23 tax year, they will pay £700 in tax, an increase of 87% since 2016.

For higher- and additional-rate taxpayers earning £10,000 a year through dividend income, their tax increases since 2016 work out at 66% and 65% respectively.

Moira O’Neill, head of personal finance at interactive investor says that the over-55s, who are the biggest holders in dividend-friendly companies like BP and AstraZeneca, will take the biggest hit.

It acts as a reminder to always manage your savings efficiently

In response to the news, Hargreaves Lansdown have stated that it is “a stark reminder that today’s tax rules can and will change.”

They also mention how it may be worth sheltering your investments from tax wherever possible. The most popular methods are to use a Stocks and Shares ISA or self-invested personal pension (SIPP), where the Dividend Tax does not apply.

If you want more information about these saving methods, read my guide on the best Stocks and Shares ISAs for investors and my guide to SIPPs and personal pensions.

Also consider: Best stocks paying dividends for 2022

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