Kwasi Kwarteng is pushing ahead with a multimillion pound tax cut for wealthy individuals despite growing concerns over the public finances, according to a report highlighting a boom for investor dividends since the Covid pandemic.
On a renewed day of turbulence in financial markets over the chancellor’s unfunded tax cutting plans, the Treasury confirmed it would reduce the rate of income tax on dividends.
The move was announced by Kwarteng during his mini-budget, alongside the Truss government’s plan to reverse the national insurance rise launched by Boris Johnson earlier this year, which is due to take effect from 6 November.
Both the rate of national insurance and dividend tax will be reduced by 1.25 percentage points by the move.
However, research by the thinktanks Common Wealth and the Institute for Public Policy Research (IPPR) showed investors had benefited from a boom in dividend payouts since the Covid pandemic at a time of meagre growth in workers’ pay.
The report found the tax cut would cost £600m a year and would largely benefit Britain’s richest individuals. It comes as ministers consider slashing public spending in order to help meet a shortfall in the public finances of about £60bn after the mini-budget.
Kwarteng last week U-turned on a controversial plan to abolish the 45p income tax rate after a rebellion by backbench Conservative MPs, but is facing continuing pressure to find savings amid a meltdown in financial markets over his tax and spending plans.
Chris Hayes, a senior data analyst at Common Wealth, who wrote the report, said: “It is a shame that the chancellor’s U-turn does not extend to his tax cuts on dividends, which benefit the very wealthy and are already subject to very generous treatment.
“For two decades, shareholders have been enjoying ever greater payouts that could have been invested productively or paid to workers. Further tilting the balance in favour of shareholders will not unleash economic dynamism. It will only deepen our stagnation.”
According to the Common Wealth and IPPR research, the value of dividends paid to shareholders in UK-listed companies has snapped back to 2017-18 levels after a drop during the Covid pandemic, without an equivalent increase in wages for workers.
Dividend income is subject to a £2,000 tax-free allowance, meaning Kwarteng’s tax cut is likely to benefit the wealthiest individuals who earn more than this amount from their shareholdings.
Among firms currently listed in the FTSE All Share index, which tracks the biggest listed UK companies, dividends steadily climbed in value at a faster rate than employee earnings during the decade from the 2008 financial crisis up to the Covid pandemic, up from £17.3bn in 2014 to £28bn in 2019.
Share buybacks, an alternative form of corporate payout whereby companies purchase shares from their investors to raise the price of the stock, have also risen sharply.
The research showed share buybacks more than doubled from £3.4bn in 2015 to £8.2bn in 2019, and have since more than quadrupled from 2015 levels to reach £16.2bn in the second quarter of 2022.
The Treasury said it was cutting the tax on dividends to signal “renewed support for entrepreneurs and investors as part of the government’s drive to grow the economy and improve the standard of life for families across the UK”.
It said reversing the national insurance increase would mean an average tax cut of £330 a year for 28 million people. Those who pay tax on dividends will save an average of £345 next year.
George Dibb, head of the Centre for Economic Justice at the IPPR, said the rise in dividend payments and share buybacks since the pandemic showed companies were prioritising shareholder payouts over productivity-boosting investment and higher wages for workers.
“It raises serious concerns for the prospects of increasing the UK’s low levels of investment. Companies engage in share buybacks when they are unable to identify investment opportunities better than driving up their own share price.
“This is a symptom of an economy where firms don’t lack funds to invest – they lack the stable environment to invest in.
“The solution is not cutting taxes or regulation, but rather a government with a clear industrial strategy.”