Income Tax: Reducing the Dividend Allowance
Published 21 November 2022
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Who is likely to be affected
Individuals with taxable dividend income above £1,000 in the tax year 2023 to 2024 and above £500 from the tax year 2024 to 2025.
General description of the measure
This measure reduces the tax-free allowance for dividend income (the ‘Dividend Allowance’) from £2,000 to £1,000 from 6 April 2023 and then to £500 from 6 April 2024 for individuals who receive dividend income.
Policy objective
This policy supports the government’s objective of putting the public finances on a sustainable path in a way that is fair, with everyone contributing a little and those on the highest incomes taking on a larger burden.
Background to the measure
This measure was announced at Autumn Statement 2022.
At Summer Budget 2015, the government announced that dividend taxation would be reformed from April 2016, abolishing the Dividend Tax Credit, introducing a £5,000 Dividend Allowance and setting the rates of tax for dividend income at: 7.5% for ordinary rate, 32.5% for upper rate, and 38.1% for additional rate. Any unused personal allowance would also be available, on top of the Dividend Allowance, to individuals who receive dividend income.
At Spring Budget 2017, the government announced that the Dividend Allowance would be reduced to £2,000 from April 2018.
At Autumn Budget 2021, the government announced that the rate of Income Tax applicable to dividend income would increase by 1.25 percentage point to 8.75% for the ordinary rate, 33.75% for the upper rate and 39.35% for the additional rate from April 2022.
Detailed proposal
Operative date
This measure will apply from 6 April 2023.
Current law
The current rates of Income Tax on dividend income are outlined in Chapter 2 of Part 2 of the Income Tax Act 2007. Section 13 sets out the dividend rates and section 13A provides that an amount, currently £2,000, is charged at a nil rate.
Proposed revisions
Legislation will be introduced in Autumn Finance Bill 2022 to change section 13A of the Income Tax Act 2007. The change will reduce the amount charged at the nil rate from £2,000 to £1,000 from 6 April 2023 and then to £500 from 6 April 2024.
Summary of impacts
Exchequer impact (£m)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| 0 | -30 | +450 | +810 | +860 | +940 |
These figures are set out in table 5.1 of Autumn Statement 2022 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
Individuals who receive taxable dividend income above £1,000 from 6 April 2023 and above £500 from 6 April 2024 will be affected. Taxable dividend income excludes, for example, dividend income from assets held in ISAs, which will continue to be entirely tax-free. It is estimated that this will affect 3,235,000 individuals in the year 2023 to 2024 and 4,405,000 individuals in the year 2024 to 2025. Around 46% of those with taxable dividend income will be unaffected by this measure in the year 2023 to 2024, falling to 27% in the year 2024 to 2025. The average loss of those affected is around £125 in the tax year 2023 to 2024, rising to £155 in the tax year 2024 to 2025.
This measure is not expected to have any significant impact on family formation, stability, or breakdown.
Customer experience is expected to stay the same for existing payers of Income Tax on dividend income. Customer experience could be affected for those being brought into dividend taxation if they are not already familiar with the process. To support individuals, HMRC provides clear guidance published on GOV.UK. See tax on dividends for more information.
Equalities impacts
These changes apply regardless of personal circumstances or protected characteristics such as sex, race or disability. Equalities impacts will reflect the composition of the population paying Income Tax on dividend income.
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 £700K. There will also be wider operational impact for HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored through information collected from tax returns.
Further advice
If you have any questions about this change, please contact: [email protected]
Declaration
Victoria Atkins MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.