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Dividend tax cut to save investors £345 a year

·2-min read
Kwarteng Kwasi Chancellor Dividend Tax Cut Mini Budget
Kwarteng Kwasi Chancellor Dividend Tax Cut Mini Budget

New Chancellor Kwasi Kwarteng is to announce a reversal of Rishi Sunak's dividend tax rise in tomorrow's mini-Budget, saving investors and some self-employed workers an average of £345 next year.

It comes as a rise to National Insurance rates has also been scrapped just months after Mr Sunak, the former Chancellor, brought it in to generate extra funds for social care and the NHS.

Both NI and dividend tax rates were increased by 1.25 percentage points in April 2022, to ensure workers did not avoid the NI rise by paying themselves via dividends instead.

The Treasury said reversing the rise signalled “support for entrepreneurs and investors as part of the Government’s drive to grow the economy and improve the standard of life for families across the UK”.

The Government said the funding for health and social care will be maintained at the same level as if the tax cut had not taken place. The now scrapped levy was forecast to raise £13bn a year.

Someone with £10,000 of dividend income will save £100 a year. If you had £60,000 of income, the saving would be £600 a year.

Everyone can earn £2,000 a year before paying any dividend tax. Dividends above that threshold are taxed at different rates based on the individual's highest rate of income tax.

Currently, basic-rate payers pay 8.75pc on dividends, higher-rate payers 33.75pc and top-rate payers – those who earn more than £150,000 a year – pay dividend tax at 39.35pc.

The basic and higher rates will fall by 1.25 percentage points.

However, the additional rate for dividend tax will be scrapped altogether, meaning the highest earners will now pay 32.5pc – a huge drop of 6.85 percentage points.

These changes kick in from April 2023 so investors and workers will not see any benefit until the 2023-24 tax year.

Laura Suter of AJ Bell, the stockbroker, said: "This means they’ll face a year of higher rates before they drop down to the previous tax rates in April 2023.

"When the move was announced it was expected to raise £1.34bn in the current tax year, and investors and company directors will still be paying that extra tax for this year."

The NI cut will take effect from November, putting money back in people's pockets immediately.