Some 600,000 more Britons are losing more of their hard-earned cash to HM Revenue and Customs (HMRC) via a “stealth tax” on investments, according to new research.
Analysis conducted by AJ Bell found that the number of investors who are paying tax on dividends has doubled in the past four years.
This is primarily due to the tax allowances being clashed under the last Conservative Government under former Chancellor Jeremy Hunt’s tenure at the Treasury.
Hunt cut the tax-free thresholds on dividend income from £1,000 to £5,000 in April, after halving it from £2,000 last year.
This year, 1.2 million higher-rate taxpayers are set to be in line to pay dividend tax, a jump from just 556,000 during the 2021-22 tax year.
Based on figures from a Freedom of Information request, close to 20 per cent of higher-rate taxpayers will be slapped with a “stealth tax” on their investments in 2024-25.
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Frozen tax thresholds and cut allowances are leading to more people losing money to HMRC
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As such, these taxpayers will collectively pay a tax bill worth £6.2billion, which is £2billion increase over the last four years.
On top of this, experts have long warned of the impact of fiscal drag which occurs when tax allowances remain the same while incomes rise.
During his time as Chancellor, Hunt froze tax thresholds until at least 2028 in an attempt to generate revenue for HMRC.
With fiscal drag and allowance cuts combined, around 3.6 million investors will pay £17.8billion in dividend tax
In comparison, there was only 1.8 million taxpayers paying this levy over 2021-22.
Laura Suter, the director of personal finance at AJ Bell, said: “The Government slashing the tax breaks on dividends means that almost two million more people will have to pay the tax.
“With the limit sitting at just £500 more basic-rate taxpayers with modest investment portfolios are having to pay the tax.
“If your investment portfolio is yielding five per cent, you only need to have £10,000 invested to hit the tax-free limit.”
Workers in the additional rate of 45 per cent will likely have to pay the majority of the UK’s dividend tax bill.
Around 320,000 of these earners, who make more than £125,140 are forecast to pay £10.4billion which means an average tax bill of £32,578 each.
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A HM Treasury spokesman said: “The previous government left the British people with the highest tax burden since the 1940s and the highest debt levels since the 1960s.
“We are committed to keeping taxes on working people as low as possible while maintaining fiscal responsibility, that’s why we’ve pledged to not raise income tax, National Insurance or VAT.
“We believe the best way to responsibly improve living standards is through economic growth by guaranteeing stability, stimulating investment, and reforming our planning and skills systems to unlock Britain’s potential.”
The Chancellor is set to announce the new Labour Government’s fiscal agenda on Wednesday, October 30, 2024.