Steps to Shield Your Dividend Income from Tax Authorities
Reduced Dividend Allowance Increases Tax Burden on Investors and Self-Employed
The tax-free annual dividend allowance has undergone significant reductions, falling from £2,000 to £1,000 in April 2023, and then halving again to just £500 in April 2024. This change has far-reaching implications for investors and self-employed individuals who rely on dividends as a source of income.
The cuts have broadened the population subject to dividend tax, nearly doubling the number of people paying it to an estimated 3.67 million in the 2024/25 tax year. This surge in taxpayers has led to increased tax revenues for the government, with an additional £450 million expected for 2024/25, and projected to rise beyond £900 million by 2027/28.
One of the key implications is the increased tax liability faced by individuals who receive dividends above the reduced allowance. This particularly affects many small investors and self-employed people operating via limited companies who often pay themselves through dividends.
In addition, the administrative burden has increased for investors receiving dividends over £500, who must declare them to HMRC, and those with dividends over £10,000 who must complete Self-Assessment tax returns.
As a result, there is a growing emphasis on utilising tax-free investment vehicles like ISAs and pensions to shelter dividend income from tax and simplify tax reporting. Income splitting and asset allocation strategies are also being considered by married couples or civil partners to reduce overall tax liabilities.
For self-employed individuals, particularly those running limited companies and drawing income via dividends, these cuts mean higher personal tax bills and potentially a reconsideration of their remuneration and investment strategies to minimise tax impact.
In summary, the ongoing cuts to the dividend allowance lead to more widespread taxation of dividend income, increased tax payments for many investors and self-employed individuals, and a greater need for tax planning involving efficient use of tax-free accounts and strategic income distribution.
[1] HMRC (2023). Dividend Tax Statistics. Retrieved from https://www.gov.uk/government/statistics/dividend-tax-statistics [2] HMRC (2023). Dividend Tax: Your Guide. Retrieved from https://www.gov.uk/government/publications/dividend-tax-your-guide/dividend-tax-your-guide--2 [3] Office for Budget Responsibility (2023). Economic and Fiscal Outlook. Retrieved from https://obr.uk/efo [4] Money Saving Expert (2023). Dividend Allowance Cut: What You Need to Know. Retrieved from https://www.moneysavingexpert.com/tax/dividend-allowance-cut/
- Reduced dividend allowance and increase in tax burden on investors and self-employed individuals might prompt them to consider diversifying their personal finance, potentially investing in tax-free vehicles such as ISAs and pensions to shelter dividend income from tax.
- With the announcement of reduced dividend allowance leading to a surge in taxpayers for the government, many investors receiving dividends over £500 now have to declare them to HMRC, and those with dividends over £10,000 must complete Self-Assessment tax returns, creating additional administrative burden.
- In the realm of personal finance, the cuts to the dividend allowance may necessitate a reconsideration of remuneration strategies for self-employed individuals, particularly those drawing income via dividends, especially since these changes lead to increased personal tax bills.
