The government plans to increase dividend tax by 1.25 percentage points, which means investors will have to pay more on the money they get from owning company shares.
The hike in dividend tax will hit anyone holding investments outside of a stocks and shares Isa, investors who have exceeded their dividend tax allowance and people who run their own businesses and pay themselves dividends.
Here, Which? looks at what the increase could mean for your money.
Dividend taxes are paid on shares, and income you get from funds that invest in shares on your behalf.
In the 2021-22 tax year, you won't need to pay any tax on dividend income on the first £2,000 you receive, under the tax-free dividend allowance.
Above this allowance, you pay tax based on the rate you pay on your other income - known as your 'tax band' or sometimes called your 'marginal tax rate'.
The table below shows how much dividend tax is currently and what it will be next year under the plans based on your income tax band.
|Income tax band||Dividend tax rate 2021-22||Dividend tax rate 2022-23|
The government is raising dividend tax rates to help fund its £12bn-a-year plan to help clear NHS waiting list backlogs and fund social care.
Social care funding issues have been known for some time, but have accelerated during the pandemic. In 2016, the government introduced a rule allowing eligible councils to hike council tax bills by up to 3% more than the capped increase to help fund social care, but it seems that the funding for this wasn't enough to tackle the social care crisis.
Speaking in the House of Commons yesterday, Prime Minister, Boris Johnson, said: 'It would be wrong for me to say that we can pay for this [coronavirus] recovery without taking the difficult but responsible decisions about how we finance it.'
So on top of the £2,000 dividend allowance, you could earn another £12,570 tax-free in 2021-22.
The government says that due to the combination of the tax-free dividend allowance and the personal allowance, around 60% of individuals with dividend income outside of Isas aren't expected to be pay dividend tax and aren't expected to be affected by the changes in 2022-23.
If you invest outside tax-sheltered wrappers you should review your portfolios to ensure you're making the most of annual contribution allowances to limit the impact on your tax bill.
The £2,000 allowance means that you'll need a fairly large portfolio outside of your investment Isa before you start paying dividend tax.
Dividends aren't guaranteed as they depend on how much profit the companies you invest in make and how much they give to shareholders.
If you do get dividend payments beyond the tax-free allowances, HMRC will count your income from work, pensions and property, then your savings income and then your dividend income to work out how much tax you pay.
If you've made any capital gains, this gets calculated after your income tax.
This process of stacking can be a good thing, because it means the dividends rather than your income will be taxed at the highest rate. As tax on dividends is lower than other income (even after the planned hike), you could reduce your overall tax bill.
The government estimates affected taxpayers will pay an average of £150 more on their dividend income in 2022-23. Affected higher-rate taxpayers are expected to pay, on average, an additional £403.
If you earn between £2,000 and £10,000 from dividend income, you'll need to inform HMRC.
The tax office can adjust your tax code so tax is taken from your salary or pension, or you could fill in a self-assessment tax return.