State pensioners could be hit with stealth tax with 39% rate – ‘A real blow!’ | Personal Finance | Finance
Last week, the Chancellor Jeremy Hunt unveiled a series of tax rises as part of the Government’s Autumn Statement. One of the announcements was confirmation that the dividend allowance would be cut next year. Financial experts are warning this is “a real blow” to those of state pension age who are more likely to benefit financially from returns on shares.
Dividends are the distribution of profits to shareholders who chose to invest in a particular organisation.
Tax is not paid on any dividend income that falls within an individual’s own Personal Allowance.
The Personal Allowance is the amount of income a person can earn each throughout the year without having to pay tax.
Through the dividend allowance, no person with shares pays any income below the threshold.
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Mr Hunt confirmed that the dividend allowance would be significantly reduced from £2,000 to £1,000 in 2023.
Previously, the dividend allowance was introduced at £5,000 but has been frozen at £2,000 for the last four years.
As well as this, the tax-free dividend limit will be further cut to £500 from April 2024 under the Government’s current plans.
One of the consequences of this will be that Britons will be taxed more tax on their dividend income from shares.
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For vulnerable groups affected by the cost of living crisis, which includes those of state pension age, this could be devastating, according to experts.
Speaking exclusively to Express.co.uk, Money Minder’s managing director Ray Black shared why older Britons are at a clear disadvantage following this tax rise.
Mr Black explained: “The dividend allowance doesn’t just affect business owners. It will also affect those people that have got investments, particularly in retirement, where they’re enjoying dividend income to help pay their bills.
“With them bringing that down now, it could almost be by 2025, you could see the dividend allowance disappearing altogether.
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“It’s on that trajectory. That isn’t a terribly big jump to take to go from a £500 dividend allowance per year to zero.
“That’s not a huge amount at all. Investors that have been used to generating an income from their investments in dividends and trusts.”
What someone pays on their dividends above the allowance depends on their income tax bracket.
Currently, basic rate taxpayers pay 8.75 percent dividends over the allowance, while higher rate taxpayers pay 33.75 percent. Anyone in the additional rate tax band pays 39.35 percent.
According to Mr Black, those affected by this new tax rise will have to rely on ISAs to mitigate the impact of the dividend allowance being slashed.
He added: “The dividend allowance being cut will have an effect particularly on investors who have been getting a regular income on top of their state pension in order to live.
“That being almost looking as though that’s going to be lost will be a real blow. But it does mean that they need to make sure that they’re using things like ISA, and such like.
“My suspicion is there may be some changes from the way business owners pay out dividends, both to themselves and their shareholders.”
