Who is likely to be affected
Individuals who pay tax on their dividend income.
General description of the measure
This measure increases the rates of Income Tax applicable to dividend income. Currently the ordinary rate, upper rate and additional rate are 7.5%, 32.5% and 38.1% respectively. This measure will increase each rate by 1.25% to 8.75% 33.75% and 39.35% from April 2022.
The dividend trust rate of Income Tax is currently 38.1%. This will also be increased to 39.35% from April 2022 to remain in line with the additional rate.
This measure supports the government’s objective of raising revenue. In England, revenue from this increase will help to fund the health and social care settlement announced in September with the Barnett formula applying in the normal way. It will also help to limit the incentive for individuals to set up a company and remunerate themselves via dividends, rather than as wages, to reduce their tax bill.
The dividend trust rate of Income Tax is being increased to ensure it remains aligned with the highest rate of Income Tax applicable to dividends as it has been since 2004.
Background to the measure
Since April 2016, the rates of Income Tax applicable to dividend income have been 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers respectively. Any individual who has dividend income can benefit from the dividend allowance which has been set at £2,000 since April 2018. Dividends within the allowance are not charged to tax and this will remain the case.
This measure will apply from 6 April 2022.
The current rates of Income Tax on dividend income are outlined in Chapter 2 of Part 2 of the Income Tax Act 2007. The current rates are set out at sections 8 and 9. Section 13 determines what dividend income is charged at each rate. For these purposes, “dividend income” is defined in section 19.
Legislation will be introduced in Finance Bill 2021-22 to change sections 8 and 9 of the Income Tax Act 2007 to increase the rates of tax applicable to dividend income including the dividend trust rate. This will also have the effect of raising the rate of tax charged under section 455, Corporation Tax Act 2010 on loans to participators and on personal representatives that are liable to tax on dividends paid into estates of deceased persons under section 14 of the Income Tax Act 2007.
Summary of impacts
Exchequer impact (£m)
|2021 to 2022
|2022 to 2023
|2023 to 2024
|2024 to 2025
|2025 to 2026
|2026 to 2027
These figures are set out in Table 5.1 of Autumn Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2021.
This measure is not expected to have any significant macroeconomic impacts. The costing accounts for multiple behavioural effects including individuals bringing some of their dividend income forward, behaviours to reduce taxable dividend income and a lower incentive for individuals to incorporate.
The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.
Impact on individuals, households and families
Individuals who receive dividend income and pay tax on that income will be affected. It is estimated that this will affect 2,555,000 individuals in the year 2022 to 2023. Shares held in ISAs are not subject to dividend tax and, due to the £2,000 tax-free dividend allowance and the personal allowance, around 59% of individuals with dividend income outside of ISAs are not expected to pay any dividend tax, or be affected by this change in 2022 to 2023. The average loss of those affected is around £335.
This measure is not expected to have a material impact on family formation, stability or breakdown. Customer experience is expected to stay broadly the same because individuals will have to report their income as usual, only the liability will change. See tax on dividends for more information.
The government estimates that more men will be impacted by this measure than women with men making up 63% of the estimated affected population. Approximately 16% of the estimated affected population are over state pension age – this does not represent a disproportionate impact for the older population. It is not anticipated that any other group with protected characteristics will be disproportionately impacted.
Impact on business including civil society organisations
This measure is expected to have no impact on businesses or civil society organisations as it relates only to individuals who are shareholders.
Operational impact (£m) (HMRC or other)
HMRC will need to make changes to IT systems to deliver this change which are currently estimated to cost in the region of £530,000.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored through information collected from tax returns.