Jeremy Hunt is considering a multi-billion-pound tax raid on profits under plans to make those ‘with the broadest shoulders’ bear the brunt of fiscal tightening he is planning to bring in within days to try to revive the economy.
The Treasury is mulling increases to Capital Gains Tax and Dividend Tax as he seeks to make fair changes to fill a £50billion gap in the UK’s finances.
The mooted proposal is likely to dismay well-off multiple homeowners, including landlords, who pay CGT on sales of property and other assets, as well as executives who sell stocks and bonds.
The dividend move will deal a blow to the many small business owners who pay themselves through dividends as an alternative to a salary that would be subject to Income Tax.
Mr Sunak raised dividend tax rates by 1.25 percentage points this year to help fund the new Health and Social Care levy.
A source close to Jeremy Hunt confirmed the tax hikes were under consideration, but said no decisions had yet been taken – stressing ‘we are two weeks away’ from the highly-anticipated autumn budget.
One option on the table is an increase in the headline rate of capital gains tax – applied on profits of the sale or disposal of shares and other property, as well as changes to relief and allowances on the levy.
This would tend to mean a greater burden on wealthier people, as they are more likely to own such assets.
Cuts to relief and allowances are most probable, The Daily Telegraph reported, but much could still change before the budget on November 17.
The newspaper also suggested the Chancellor is looking at increasing dividend taxes and halving or even slashing altogether the £2,000 tax-free dividend allowance.
Whitehall sources said Mr Hunt was looking at raising the rate of tax investors pay on share dividends. The tax-free allowance for dividend income could also be slashed.
A source said the proposal was in line with Rishi Sunak’s stated aim that ‘those with the broadest shoulders should be asked to bear the greatest burden’.
Former chancellor Kwasi Kwarteng announced in September that the rise would be reversed at the same time as a similar increase in national insurance.
At the time the Treasury said the move ‘signals renewed support for entrepreneurs and investors as part of the Government’s drive to grow the economy’.
But Mr Hunt abandoned the plan last month when he tore up Mr Kwarteng’s controversial mini-Budget. Now he is looking at raising dividend tax rates by a further 1.25 percentage points.
In addition, the tax-free allowance, which has already been whittled away to just £2,000 could be cut again to £1,000.
Dividend tax is levied at three rates: 8.75 per cent for those who pay basic rate tax; 33.75 per cent for those on the higher tax rate; and 39.35 for those on the top rate of tax. A basic rate taxpayer with £5,000 in dividend income would see their tax bill rise from £262.50 to £400. Someone paying 40p tax with £10,000 in dividend income would see their tax bill jump from £2,700 to £3,150.
The move is expected to raise the Treasury a sum in the ‘low billions of pounds’.
However, a rise in dividend tax is likely to have a serious impact on small business owners and entrepreneurs who pay themselves through dividends.
Former government advisor, and founder of the Business Champion Awards, Richard Alvin said: “the news that the chancellor is looking at increasing the dividend tax rate is a bitter blow for the army of UK entrepreneurs and small business owners who take their own remuneration in the form of dividends and many who were excluded from any financial assistance during the pandemic. With many barely surviving due to the increase in their costs due to the cost of living crisis a further increase in their own costs in the form of this tax rate rise could see many closing their doors.
Roger Barker of the Institute of Directors, told the Financial Times: ‘Small businesses are not big earners as a whole, and they have already been penalised during the pandemic.’
Craig Beaumont, of the Federation of Small Businesses, said the Government was ‘making it harder and harder for small business owners to make any profit. It’s the opposite of what you’d do if you want growth.’
Mr Hunt has been boxed in by a Tory pledge not to raise the rates of income tax, VAT and national insurance, which are the principal sources of government income.
The Treasury is also thought to be considering changing rules regarding non-dom taxpayers.
It comes as Britain faces its longest recession since the Great Depression, with 5million mortgage holders facing paying £3,900-a-year more and the average household £800 worse off in 2023.
The UK will suffer the tightest squeeze on real incomes since the Second World War because of the way inflation will eat away at average earnings.
Hunt’s capital punishment for small businesses as chancellor looks to increase dividend taxes to fill £50billion economic black hole