Britons face ‘unfair’ 39% tax rate with rule change in 2023

Jeremy Hunt says that some taxes ‘will have to go up’

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A consequence of this is that Britons with shares could be hit with a 39 percent tax rate in the coming months. Last year, Chancellor Jeremy Hunt confirmed the Government’s intention to slash the dividend allowance even further in 2023. In April, the dividend allowance will be cut from £2,000 to £1,000 and will be reduced to £500 in 2024.

As announced during the Government’s Autumn Statement in November, those with shares will be disproportionately affected by this decision.

A dividend is the term used to describe the distribution of profits which are handed out to shareholders in a company.

If someone’s income falls within the threshold of a taxpayer’s Personal Allowance, no levy needs to be paid.

Someone’s Personal Allowance is the amount of income a Briton can earn without being legally obligated to pay tax.

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Notably, every person is awarded a dividend allowance annually and they also only pay tax on any income over the threshold.

For those claiming dividends from money invested in ISAs, there is no extra tax that needs to be paid off.

Introduced in 2017, the dividend allowance was created by the Government to assist taxpayers in saving money better.

When it was first implemented, the dividend allowance started at £5,000 however consecutive administrations have kept it frozen at £2,000 for the past five years.

Even with this threshold freeze, the vast majority of taxpayers did not see their dividend income reduced as a result.

However, with 2023’s dividend allowance cut and further intervention in the years ahead, those with shares are likely to be detrimentally impacted going forward.

How much an individual pays on income from dividends is entirely dependent on their income tax bracket.

As it stands, basic rate taxpayers currently pay 8.75 percent on any dividends over this personal allowance.

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On top of this, those who are higher rate taxpayers pay 33.75 percent and anyone in the additional rate tax band pays 39.35 percent.

Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, outlined what this tax rule change means for those in different tax brackets.

She explained: “The dividend allowance falls in April from £2,000 to £1,000 – and will halve again the following April.

“To add insult to injury, they’ll also be taxed at the higher rates introduced last April – at 8.75 percent for basic rate taxpayers, 33.75 percent for higher rate taxpayers and 39.35 percent for additional rate taxpayers.

“Business owners who pay themselves with dividends out of profits will take a hit at a time where they’re facing threats to their businesses from all angles – from runaway energy bills to rising prices and wage bills.”

The financial expert highlighted how these changes to the dividend alliance will particularly hit those relying on income from investments hardest.

Ms Coles added: “In addition to the hit on dividends held outside of tax wrappers and exceeding the new smaller allowance, investors face a capital gains tax blow too.

“The annual allowance is being slashed from £12,300 to £6,000 – before being halved to £3,000 the following April. Having invested diligently for the long term to build their financial resilience, it’s going to feel particularly unfair to be trapped by this allowance-cutting pincer movement.”

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