CHANCELLOR Rachel Reeves is reportedly considering a significant increase in dividend tax in the upcoming Budget as part of efforts to plug the public finances.
She could potentially raise the basic rate from 8.75% to around 16% and the £500 dividend allowance could be reduced or removed entirely, The Telegraph reports.
Such changes would substantially increase tax bills for millions of people who receive part of their income from dividends, including small company directors, freelancers who operate through limited companies, and ordinary investors with modest share portfolios.
Experts have slammed the idea as “another blow to business owners”.
Scott Gallacher, Director at Leicester-based Rowley Turton, said: “Raising dividend tax would be an absolute breach of Labour’s promise not to increase taxes on working people.
“A huge number of hardworking individuals — plumbers, builders, shopkeepers, consultants, and even financial advisers — are paid through their own limited companies and take part of their income as dividends.
“These people are the backbone of the UK’s small-business economy. Increasing dividend tax is, in reality, a direct tax rise on working people. It’s also wrong to claim that dividends are ‘taxed less’ than salary.
“Salary is deductible for corporation tax, whereas dividends are paid only after corporation tax has already been applied. When you combine corporation tax with dividend tax, the total tax burden is very similar to salary. So the idea that dividend-takers have been enjoying some kind of special tax break simply isn’t true.”
Ross Lacey, Director & Independent Financial Adviser at Rayleigh-based Fairview Financial Management, agreed, adding: “Raising dividend tax would be another blow to business owners. “Over the past few years we’ve seen higher corporation tax, higher employers national insurance and a lower dividend allowance.
“Coupled with the new Employment Rights Bill and there’s no wonder businesses, particularly smaller ones, are barely standing still let alone growing and creating jobs.”
Stephen Perkins, Managing Director at Norwich-based Yellow Brick Mortgages, said company directors will be hit.
He added: “A rise in dividend tax would be a hammer blow to all limited company directors primarily across small and medium enterprises. It is another disincentive to start and grow a business.
“There needs to be differentiation between dividends on investments and dividends from your own business, maybe taxing dividends from companies where shareholding is over 20% less, by exemption or relief.”
Sam Alsop-Hall, Chief Strategy Officer & Co-Founder at Birmingham-based Clive Henry Group, was scathing about the government.
He continued: “A dividend tax hike would be a heartbreaking betrayal of Britain’s working spirit. The people who build, employ, and take risks are the ones who get up early, work late, and keep this country going.
“They are the small business owners, the self-employed, the alarm clock heroes. To tell them they are not ‘working people’ is an insult. These tax rises would hit those who actually create opportunity and growth, not those hiding from it.
“It is happening because Labour has no plan for growth and no answer to why 8.3 million people are on Universal Credit. Instead of backing the builders, they are breaking their backs.
“If this is how Britain treats its value creators, the message is clear and tragic. Don’t bother trying. Don’t build. Don’t dream. Just pay up and be quiet. It’s the slow death of aspiration.”
Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, said the move will disincentivise business.
He added: “It’s difficult to tell if the constant stream of tax rumours are pitch rolling or pushing the expectations so low that we all breathe a sigh of relief when the budget actually comes around.
“Hiking the tax on dividends, through either an allowance cut or increased rate, would clobber not only the business owners driving economic growth but also the savings culture the government says they want to achieve.
“This appears to be a myopic government that has no concept of incentives and reward, only cash cows to be squeezed.”
Michelle Lawson, Director at Fareham-based Lawson Financial, said small business owners are important to the country.
She continued: “A hike in dividend tax is another kick in the teeth for small business owners from a government that says they champion entrepreneurship.
“The legacy that Labour will leave is being the party that sunk the UK. Making the UK one of the most expensive countries in the world to run a business is short-sighted and people should be rewarded for success, not penalised for it.”
Patricia McGirr, Founder at Burnley-based Repossession Rescue Network, said Labour’s plans would hit small businesses.
She added: “The government has already repeatedly broken manifesto pledges and lost all credibility. We’ve had stealth tax, wealth tax, health tax and every other way the Chancellor can ‘fix’ the parlous state of the public purse.
“Given none of this is her fault of course, but a toxic legacy from the Tory era, the saying, ‘you can shear a sheep many times but skin it only once’ springs to mind.
“Businesses need to be incentivised and supported to grow, but at this rate Labour risk killing off the whole flock.”
Dariusz Karpowicz, Director at Doncaster-based Albion Financial Advice, agreed, adding: “Apparently running your own business makes you a non-worker in Labour’s dictionary. Small company directors taking dividends already pay corporation tax, then dividend tax on top, bringing the total to over 40%. That’s hardly the tax dodge Rachel Reeves suggests it is.
“You’re telling plumbers, builders and consultants who work sixty-hour weeks that they’re not working people. These are the same folk who got zero Covid support whilst keeping Britain running.
“Now you want to squeeze them further whilst 8.3 million collect Universal Credit. Britain already costs a fortune to run a business in; this could finish off what’s left of our entrepreneurial spirit. The message to anyone considering starting a company is brutally clear: find another country that actually values business creators.”
Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, said small business owners have been hit hard already.
“Rachel sparked speculation by delaying the Budget, upsetting many one-man businesses that lacked Covid support. Labour argues this won’t breach their ‘no tax rises for working people’ pledge, claiming only the wealthy get dividends.
“However, 74% of UK private sector businesses in early 2024 were solo owners, with 5.2 million micro businesses (up to 9 employees) making up 95% of all firms. While dividend tax is lower (8.75%) than income tax (20%), dividends come from profits already taxed at 25%.
“The real saving for small business owners is avoiding National Insurance contributions, not the income tax difference.”
Whether or not the policy will be implemented remains to be seen as the news is awash with leaks at present.
Photo by Jamie Street on Unsplash
