Hundreds of thousands of investors looking forward to a cash bonanza as companies ready to pay record dividends will have to hand over more tax.
As companies put together plans to issue dividends of almost £91 billion, the government has punched a hole in shareholder investment strategies by reintroducing plans to cut tax breaks on the payments.
The dividend pay-out is the highest since 2014 and results from foreign exchange differentials on sales overseas against the weak pound.
Around 2.27 million investors face Chancellor Phillip Hammond slashing the annual tax-free dividend allowance from the current £5,000 to £2,000.
The move was first put forward in his Spring Budget 2017, but axed in the run-up to the General Election.
Scrapped before election
At the time, the Tories made clear that if they won the election, the policy would stand.
Now the measure is included in new legislation that will be tabled as soon as possible after the Westminster summer break, says the Treasury.
The new cap will start from April 6, 2018.
The dividend tax allowance was explained in an HMRC policy paper published in March which is not expected to change over the summer.
The aim was to smooth tax relief between direct shareholders and investors staking cash in a company in an ISA.
The allowance reduction also makes tax on profits more even between the self-employed and directors working for their own companies.
The tax will be paid at 7.5% on dividends over £2,000 by basic rate taxpayers (20%); 32.5% for higher rate taxpayers (40%) and 38.5% for additional rate taxpayers.
Thousands more may pay extra tax
Investors holding shares through an ISA or pension do not pay tax on dividends personally.
“Individuals and households who receive dividend income in excess of £2,000 will be affected. Around two thirds of all those with dividend income, will be unaffected by this measure. It is estimated that this will affect around 2.27 million individuals in 2018 to 2019 with an average loss of around £315,” said the HMRC policy paper.
Financial experts suggest investors hold shares in an ISA or pension to reduce the impact of the allowance cut.
““A significant number of our customers have portfolios over £50,000 that are not being held within a tax efficient wrapper such as an ISA,” said Darren Cornish, customer experience director at The Share Centre.
“These are not company directors paying themselves through dividends – many are pensioners who turned to investing because interest rates were so low. They could see their tax liability increase by hundreds or possibly thousands when the allowance is reduced. Taken across the industry as a whole we estimate there are around 90,000 investors in this position.”