Investors and self-employed workers are expected to collectively pay £600m more in tax as a result of the government’s 1.25% divided tax hike.

Shareholders who pay themselves via company dividends in addition to a salary will also be largely affected by the move.

The tax rise, made alongside a 1.25% hike to national insurance contributions, comes as part of the government’s attempt to raise funds in support the UK’s social care system

The changes are to come into effect from April 2022 and from 2023, the government confirmed the national insurance increase will appear on payslips as a separate Health & Social Care levy.

Hargreaves Lansdown personal finance analyst, Sarah Coles, said the dividend tax hike will hit anyone holding investments outside an ISA, as well as those who run their own businesses and pay themselves dividends.

“Investors have had to crawl through a horrible a dividend drought during COVID, and were just getting back on their feet, so this will feel like a particularly nasty attack on their income,” Coles commented. “Given that so many of them will also have a higher national insurance bill, it deals them a double blow at a difficult time.

“For investments held outside an ISA, after the tax-free dividend allowance of £2,000, you will face a higher tax bill. It means it’s worth thinking about the kinds of investments you hold within your ISA.

“For business owners, paying themselves in dividends will often still be more tax efficient than paying themselves more income, because even after the change, dividend tax will still be lower than the equivalent income tax.”

AJ Bell head of personal finance, Laura Suter, said the tax hike looks like a “last-minute policy addition”, positioned as “spreading the pain of tax increases across society”.

“At £10,000 of dividends this equates to £100 a year more, regardless of your tax bracket, while at £20,000 a year it means an extra cost of £225,” Suter highlighted.

“Retail investors will only be impacted if they have significant portfolios outside of a pension or ISA as these shelter dividends from tax. Even then, they will only be caught and face a higher tax bill if their annual dividends are over the annual dividend allowance of £2,000.

“To be in that position you’d have to have a portfolio of over £50,000 if it was yielding 4% a year and the government estimates that around 60% of people who have dividend income outside of ISAs will not see a tax increase next year.”

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