More investors and company directors are being dragged into the tax net by the cut to the dividend allowance.

In November 2022, the Chancellor announced that the tax-free allowance for dividend income would be cut from £2,000 to £1,000, with a further reduction to £500 to be introduced in April 2024. According to HMRC’s figures, the Government is expected to take £17.6 billion from investors and company directors in the 2023-24 tax year, an uptick of more than £2 billion from the previous year. In addition, Government estimates for the dividend tax in 2022-23 have increased from £14.4 billion to £15.8 billion – providing an additional £1.4 billion for Government coffers.

For any dividends over this allowance, basic rate tax payers will be charged 8.75%, higher rate 33.75% and additional rate 39.35%. The combination of the additional-rate threshold being lowered to £125,140, and the dividend tax allowance being cut, means far more people are facing tax on their dividends up to the highest rate of 39.5%. More people will be drawn into the dividend tax net in April 2024, when the allowance is cut again to £500, which could now affect those receiving modest dividend payments. Anyone brought into paying dividend tax is required to fill in a self-assessment tax return, many for the first time.

The changes to the tax regime which has seen the raising of dividend tax rates, a reduction in the tax-free allowance and changes to the additional rate threshold will have led to higher tax bills for many.

If this is an issue for you, there are tax-efficient methods to help. Lowes Advisers can discuss your circumstances to see if and where they may apply.

Lowes Financial Management is authorised and regulated by the Financial Conduct Authority.