Following the recent government spending review, reports suggest that Chancellor Rachel Reeves may introduce significant dividend tax reforms in the Autumn Budget 2024. Proposed changes include:
Scrapping the £500 dividend allowance
Increasing the top dividend tax rate from 39.35% to 45% (aligning with the highest income tax rate in England, Wales, and Northern Ireland)
These potential changes come alongside new HMRC reporting rules, requiring business owners to disclose dividends separately on their self-assessment tax returns from the 2025/26 tax year.
Why Are Business Owners Concerned?
The proposed reforms have raised concerns that HMRC may intensify scrutiny on how shareholders—particularly in family-owned businesses—distribute dividends. Structures like “alphabet shares”, which allow flexible dividend payments (e.g., paying dividends on Ordinary A shares but not Ordinary B or C shares), could face challenges.
This follows other recent tax pressures on businesses, including:
Changes to Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
Reductions in Business Property Relief (IHT)
Rising National Minimum Wage & Employer NICs
Many small business owners already feel overburdened by tax hikes, and further dividend tax increases could push some to reconsider their financial strategies.
Potential Impact on Shareholders & Business Structures
If the dividend allowance is removed and the top tax rate rises to 45%, the effective tax rate on dividends could reach 59% when combined with corporation tax. This could lead to:
Reduced dividend payouts by business owners
Shift towards salaries or bonuses instead of dividends
Restructuring businesses as sole trades, partnerships, or LLPs
What Should Business Owners Do Next?
With HMRC increasing transparency requirements, business owners should:
Review current dividend policies to ensure compliance
Consider alternative tax-efficient extraction methods (e.g., salary vs. dividends)
Plan ahead for the 2025/26 tax year changes
The Autumn Budget 2024 will provide clarity, but proactive tax planning is essential to mitigate rising costs.
