Investors and small businesses could take a hit as Jeremy Hunt eyes tax raid on share dividends to fill hole in public finances

  • Jeremy Hunt is drawing up plans for a second raid in a year to fill £50billion hole
  • Sources said Mr Hunt might raise rate of tax investors pay on share dividends 
  • It will dismay older investors who rely on shareholding as pension supplements

Jeremy Hunt is planning a Budget raid on dividends in a move that will hit investors and small businesses.

The Chancellor is drawing up plans for a second raid in a year on those who benefit from share income as he tries to fill a £50billion hole in the public finances.

Whitehall sources said Mr Hunt was looking at raising the rate of tax investors pay on share dividends. The tax-free allowance for dividend income could also be slashed.

A source said the proposal was in line with Rishi Sunak’s stated aim that ‘those with the broadest shoulders should be asked to bear the greatest burden’.

However, it will dismay the army of older investors who rely on shareholdings to supplement their pensions. And it will deal a blow to the many small business owners who pay themselves through dividends. Mr Sunak raised dividend tax rates by 1.25 per cent this year to help fund the new Health and Social Care levy.

Jeremy Hunt is planning a Budget raid on dividends in a move that will hit investors and small businesses

Former chancellor Kwasi Kwarteng announced in September that the rise would be reversed at the same time as a similar increase in national insurance.

At the time the Treasury said the move ‘signals renewed support for entrepreneurs and investors as part of the Government’s drive to grow the economy’.

But Mr Hunt abandoned the plan last month when he tore up Mr Kwarteng’s controversial mini-Budget. Now he is looking at raising dividend tax rates by a further 1.25 per cent.

In addition, the tax-free allowance, which has already been whittled away to just £2,000 could be cut again to £1,000.

Dividend tax is levied at three rates: 8.75 per cent for those who pay basic rate tax; 33.75 per cent for those on higher rate tax; and 39.35 for those on top rate tax. A basic rate taxpayer with £5,000 in dividend income would see their tax bill rise from £262.50 to £400. Someone paying 40p tax with £10,000 in dividend income would see their tax bill jump from £2,700 to £3,150.

The move is expected to raise the Treasury a sum in the ‘low billions of pounds’.

However, a rise in dividend tax is likely to have a serious impact on small business owners and entrepreneurs who pay themselves through dividends.

Roger Barker of the Institute of Directors, told the Financial Times: ‘Small businesses are not big earners as a whole, and they have already been penalised during the pandemic.’

Craig Beaumont, of the Federation of Small Businesses, said the Government was ‘making it harder and harder for small business owners to make any profit. It’s the opposite of what you’d do if you want growth.’

Mr Hunt has been boxed in by a Tory pledge not to raise the rates of income tax, VAT and national insurance, which are the principal sources of government income.

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