Many receive income through dividends as well as or instead of the payroll and the new scheme set to be introduced from April 2022 will mean basic-rate payers will now pay an 8.75 per cent tax on dividends, up from 7.5 per cent after the first £2,000.
Higher-rate payers will pay 33.75 per cent, up from 32.5 per cent and those paying the top rate of tax will pay 39.35 per cent, up from 38.1per cent.
For example, someone who is a higher rate taxpayer taking £10,000 in dividend payments needs to pay 33.75 per cent on £8,000 of dividends with a dividend tax bill of £2,700, an increase of £100 on the current system.
Owen Kyffin, director of Whitley Stimpson, said: “The Government is acting quickly to try and plug the yawning gap in its care budget and these measures will come as a blow to many business owners and sole traders who use dividends who have already had to struggle through the pandemic.
“Dividend payments have been hit in recent years with the tax-free allowance being cut from £5,000 to £2,000 in 2018 and it seems those running businesses are becoming an easy target for HMRC.” he said.
Owen urged business owners to take advice on how to ease the blow of the tax hikes.
“ISAs and pensions are still attractive options for dividend income but individual circumstances vary according to the individual, so it is important that business owners receive the right advice before it is too late.”