However, returns are subject to tax once they exceed the current tax-free allowance of £500 a year.
Investors currently pay 8.75%, 33.75% or 39.35% on anything over the threshold, depending on their marginal rate of income tax. Shares held in individual savings accounts (Isaare exempt.
If the Chancellor raised the lowest rate of dividend tax to 12.75%, it would cost 3.2 million basic ratepayers £380 a year on average, according to IG analysis.
A four-percentage-point rise would also cost the average higher-rate taxpayer an extra £996 a year, while someone in the additional rate tax bracket would pay £3280 more.
Currently, nearly a fifth of all higher-rate taxpayers pay dividend tax, with an average bill of £6202, according to stockbroker A.J. Bell. Additional-rate taxpayers see an average bill of £28,879.
Healy said the Government needed to “keep its hands off” investments.
He said: “Dividend tax changes might look like a quick and painless way to raise revenue, but an increase will hurt millions of people and undermine the Government’s own ambition to build a nation of investors.
“At a time when households are trying to grow their wealth and the UK stock market needs long-term capital, now is the worst possible moment to make investing in UK stocks less attractive.
“We are urging the Government to keep its hands off our investments. Any raid on dividend tax or other investment incomes sends completely the wrong message to the many savers the Government wants to convert to investing.”
IG also said that scrapping the £500 allowance – a measure proposed by former Deputy Prime Minister Angela Rayner in her leaked memo – was “potentially on the cards” and would raise another £325 million.
The allowance has been slashed in recent years, falling from £2000 in 2022-23 to just £500 this year. Removing it entirely would result in an extra bill of £62.50 for basic-rate taxpayers.
‘Cannonball to crumbling edifice’
The Chancellor is expected to raise taxes in the Budget on November 26 (local time) as she looks to raise up to £50b to shore up the UK Treasury’s finances.
This week, the Investment Association, which represents financial institutions including investment firms, wrote to Treasury to warn against cutting the cash Isa allowance and introducing a minimum UK shareholding on stocks and shares Isas.
It said that while it supported the Government’s aim to encourage more people to invest, these reforms were not the best method through which to encourage UK investment.
Whatling said increasing dividend tax sent the wrong message to those who help support growth.
He said: “Small business owners and entrepreneurs, who take genuine financial risk to build and scale companies, often rely on dividends as a legitimate and well-established means of remuneration.
“Increasing the tax burden on that income, after successive cuts to the dividend allowance, is another cannonball to an already crumbling edifice – the incentive to build and invest in the UK.
“If the Government is serious about long-term growth, it must focus on policies that create the conditions for investment and innovation, not ones that chip away at the rewards for taking commercial risk.”
A Treasury spokesman said: “We do not comment on speculation around changes to tax.”
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