St James’ Place: Labour’s dividend tax plans could backfire  

Any attempt to yield more revenues through increasing the top rate of tax on dividends may backfire and instead dry up revenue streams, Chancellor Reeves has been warned, as investors look to this year’s Autumn Budget with a sense of dread.

Reeves is poised to hike taxes later this year by as much as £20bn in order to keep her small fiscal buffer intact, according to analysts at KPMG, prompting suggestions the Treasury is already considering possible levers it can pull to raise funds.

According to The Sunday Times, one such tax rise believed to be under review is increasing the 39 per cent tax rate on dividends or abolishing a £500 allowance, which could save the government £325m. 

But City investors are warning that any plans to do so could flop as higher dividend taxes would trigger a “rethink” on remuneration, wealth management advisory St James’ Place has warned. 

Its head of advice Claire Trott suggested changes would cause a “real headache” for individuals who build long-term plans around dividends, forcing firms and Britons to reconsider strategies to become more tax efficient. 

“Changes to dividend allowances, and dividend taxation rates would mean a rethink for many on their remuneration strategy, possibly leaning more towards salary than dividends depending on the size of the changes,” Trott said.

“For those taking financial advice this would mean that changes like this can be somewhat mitigated by a change in strategy and therefore possibly not yielding revenue gains for the government.”

Business surveys have pointed to the damaging effect higher national insurance contributions (NICs) have had on investment plans this year, with firms telling researchers at likes of the Institute of Directors (IoD) and the Recruitment and Employment Confederation they were not confident about splashing out on employment and better technology in the next year. 

St James’ Place has suggested that the end of an allowance may force individuals to choose other investment plans which are taxed less. 

Trott warned that some such plans provided may “deter investments in UK businesses” in a time where the government is pushing pension funds to commit five per cent of assets into UK private capital. 

Dividend tax just one of many options

The ending of the allowance could also further complicate the UK tax regime, even after economists warned the partial reversal of the end of winter fuel payments would inflate compliance costs. 

A separate City source suggested that there were countless issues that could trouble the taxman, including communications problems with HMRC over tax requirements, if the dividend allowance was reduced.

It was also suggested that changes could encourage more people to invest through ISAs than by other means, which would be tax-free.

Another tax option reportedly being explored by the Treasury – and highlighted as a possible revenue raiser by deputy prime minister Angela Rayner – is upping tax on lenders by raising the surcharge from three per cent to around five per cent, which could raise as much as £700m.

UK Finance chief executive David Postings recently told City AM that any such tax would make banks less competitive than those across the Channel. 

“Banks based in the UK already pay a significantly higher rate of tax than those in New York and are expected to pay notably higher rates of tax than in other European capitals,” he said. 

Postings urged the government to take a different approach to taxation. 

“To make the UK’s approach to bank taxation globally competitive, we think the government should phase out the bank corporation tax surcharge and the bank levy over time.”