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Reversal on planned UK dividend tax cut a ‘blow to entrepreneurs’

Jeremy Hunt’s decision to retain the UK’s increased rate of income tax on dividends will hit entrepreneurs hardest, according to one legal expert.

Earlier this week the chancellor announced that the 1.25% tax increase on dividends, introduced in April to coincide with a rise in National Insurance contributions, was not going to be reversed. It means individuals with dividends in excess of the £2,000 annual allowance will continue to pay the increased rates of 8.75%, 33.75% and 39.35% tax on dividends – depending on whether they are basic, higher or additional rate taxpayers.

Only last month, Hunt’s predecessor, Kwasi Kwarteng, had pledged to lower the levy back to the 2021-22 rates of 7.5%, 32.5% and 38.1% as part of £45 billion of tax cuts included in the government’s ‘mini’ budget. But delivering a statement in the House of Commons, Hunt told MPs that he would “reverse almost all the tax measures” announced in the growth plan that had not yet been legislated for in parliament.

Hunt said that the financial markets were “asking serious questions” about the new administration’s “commitment to sound public finances” after the value of the pound fell and the cost of government borrowing rose in the wake of the ‘mini’ budget. The chancellor said the “interests of economic stability mean the government needs to change course”.

He announced the reversal of around £32bn of the £45bn tax cuts in the mini budget, insisting that the U-turn would “ensure there is trust and confidence in our national finances.” Abandoning the cut to dividend tax rates, the chancellor said, would save the government around £1bn each year.

Abigail McGregor of Pinsent Masons said the decision was a “blow” to entrepreneurs, many of whom receive dividends as part of their overall package of remuneration. “They now face continued higher taxes on their income and a tax rise that is out of line with the remainder of income tax. This is something of a departure from the usual approach to dividend tax rate changes, where rates have been adjusted equally across the different types of income,” she said.

“The chancellor may well have felt that impacting this category of taxpayer was a political risk worth taking, particularly given dividend taxation remains lower than the other rates of income tax,” McGregor added.

Hunt told MPs that he would continue with the plan to abolish the health and social care levy and the changes to stamp duty land tax– which have already started their passage through parliament. Peter Morley of Pinsent Masons said: “Businesses will be pleased to see that the £1 million annual investment allowance has survived the cut. In addition, helpful changes to the seed enterprise investment scheme (SEIS) and company share option scheme (CSOP) are set to remain.”

The chancellor also said he would proceed with “wider reforms to investment taxes” – possible confirmation, McGregor said, that the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) will both be extended beyond 2025 as planned. Hunt did not address the status of the government’s plans to remove the cap on banker’s bonuses in the speech but, in response to a later question, he implied that it would proceed.

“The chancellor also confirmed, in response to a question in the debate, that investment zones will go ahead. The window to make expressions of interest to become an investment zone closed on 14 October, so those who have applied will hope that their efforts have not been wasted. Since the tax reliefs which will be included inside investment zones have not yet been fixed, it may be that the value of those reliefs is lower than originally anticipated,” McGregor said.

Morley added: “Ultimately, Hunt’s announcement was aimed at creating economic stability, but we will have to wait until 31 October to be given more detail on the changes. For businesses and individuals, this means there is further uncertainty for the time being. It is very difficult to advise in this landscape.”

Other reversals announced included cancelling the plans to introduce VAT free shopping for tourists, cancelling the planned freezes to alcohol duty rates and deferring the reduction of basic rate income tax to 19% indefinitely. The chancellor also confirmed that changes to IR35 tax rules would not go ahead.

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