Investors warned of £11.6 billion tax grab on interest and dividends
3rd July 2023 11:51
by Alice Guy from interactive investor
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interactive investor crunches the numbers on interest and dividend income.
HMRC figures released last week reveal how tax on interest and dividends has soared since 2020/21, tax on interest increasing £5.1 billion since 2020/21 and tax on dividends rising £6.5 billion during the same period.
HMRC tax figures | Type of taxpayer | 2020/21 | 2021/22 | 2022/23 | 2023/24 | Increase | % Increase |
£ million | |||||||
Tax paid or due on interest | Basic and saver rate taxpayers | £160 | £150 | £393 | £705 | £545 | 341% |
Higher rate taxpayers | £398 | £357 | £994 | £1,498 | £1,100 | 276% | |
Additional rate taxpayers | £862 | £727 | £2,055 | £4,349 | £3,487 | 405% | |
Total interest tax | £1,419 | £1,235 | £3,438 | £6,560 | £5,141 | 362% | |
Tax paid or due on dividends | Basic and saver rate taxpayers | £1,221 | £1,136 | £1,243 | £1,337 | £116 | 10% |
Higher rate taxpayers | £3,849 | £5,140 | £6,510 | £6,530 | £2,681 | 70% | |
Additional rate taxpayers | £6,089 | £7,190 | £8,026 | £9,755 | £3,666 | 60% | |
Total dividend tax | £11,160 | £13,470 | £15,780 | £17,640 | £6,480 | 58% |
Source: HMRC data.
Interactive investor calculations reveal the potential cost of interest tax and dividend tax with different levels of tax saving and investment wealth and the impact of the shrinking dividend tax allowance from £2,000 last year to £1,000 this tax year and £500 next tax year.
Income tax due on savings
Cash savings | £20,000 | £50,000 | ||
Interest payable | Annual interest rate | 4% | £800 | £2,000 |
5.50% | £1,100 | £2,750 | ||
Tax payable | Basic rate | 4% | £0 | £200 |
5.50% | £20 | £350 | ||
Higher rate | 4% | £120 | £600 | |
5.50% | £240 | £900 | ||
Additional rate | 4% | £360 | £900 | |
5.50% | £495 | £1,238 |
Source: ii scenarios only
Dividend tax due on dividends
2022/23 | 2023/24 | 2024/25 | ||||||
Share portfolio | £30,000 | £50,000 | £30,000 | £50,000 | £30,000 | £50,000 | ||
Dividend income of 4% | £1,200 | £2,000 | £1,200 | £2,000 | £1,200 | £2,000 | ||
Tax payable | Basic-rate taxpayer | 8.75% | £0 | £0 | £0 | £88 | £61 | £131 |
Higher-rate taxpayer | 33.75% | £0 | £0 | £68 | £338 | £236 | £506 | |
Additional rate taxpayer | 39.35% | £0 | £0 | £79 | £394 | £275 | £590 | |
Source: ii scenarios only.
Alice Guy, Head of Pensions and Savings, interactive investor says: “Until recently most of us have earned next to nothing on any cash savings as interest rates were at an all-time low until the middle of 2022. But increasing interest rates available on cash mean that for the first time in many years it’s possible to earn a healthy amount from cash savings, and where there’s money, there’s tax.
“With interest rate increases and dividend allowances being slashed, tax on dividends and savings is becoming an increasingly important source of revenue for the government.
“Cash savers need to watch out as they’ll potentially have to hand over a sizeable amount to the taxman which will erode the value of their cash savings over time. A higher-rate taxpayer with £20,000 in cash savings who earns 5.5% interest (one of the highest rates currently available on a fixed-term deposit account) will owe £240 tax this year on their £1,100 interest unless they protect their cash inside an ISA or pension.
“Basic-rate taxpayers can earn £1,000 interest each tax year before they owe any tax, whereas higher-rate taxpayers will have to pay tax on interest over £500, while additional rate taxpayers have no tax-free interest allowance.
“And dividend tax is also on the rise with dividend allowances being slashed from £2,000 last tax year to £1,000 this tax year and £500 from April 2024. That means a higher-rate taxpayer earning dividend income of £2,000 will have to pay £338 tax this year compared with £68 last year.
“There’s a very simple solution as saving or investing inside a tax-free wrapper such as an ISA or pension will protect your wealth from the taxman. You can save or invest up to £20,000 inside an ISA each tax year and you can invest up to £60,000 each year in a pension, up to the amount you earned in that tax year.
“Cash savers also need to think about how easy it is to access their cash, as there’s no point tying up money needed for emergencies in a lifetime ISA or pension you can’t access for years. Instead, it’s important to match your investments and savings to your needs, using a pension for long-term investments and an easy-access cash ISA for amounts you’re likely to need in the next year.”
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