A Government report has suggested that tax rates on dividends should be brought in line with income tax rates.
Shareholders currently get a tax-free allowance for dividends of £2,000. After that, basic rate taxpayers have to pay tax on the dividends they receive of 7.5%, higher rate taxpayers pay 32.5% and additional rate taxpayers pay 38.1%.
The £2,000 tax-free allowance has just been reduced from £5,000 in April this year and the current dividend tax system - which replaced dividend credits - was itself only introduced in 2016.
Now the Office of Tax Simplification (OTS) has said that the system of taxing dividends is too complex and suggests one option is to tax dividend income above the allowance at the income tax rates of 20%, 40% and 45%.
It means that shareholders would have to pay substantially more tax on the dividends they receive. Many business owners take money out of their business as dividends so they could face much higher tax bills if these changes were made.
The proposal would be a "major blow to the self-employed", according to freelancer body IPSE. Andy Chamberlain, deputy director of policy at IPSE, said: "One of the key principles of tax policy is certainty. Businesses need certainty so that they can invest confidently without the cloud of constant regulatory change. Reviewing the taxation of dividends yet again goes completely against this principle and creates nothing but uncertainty for the self-employed.
"With HMRC currently consulting on extending IR35 to the private sector and gathering evidence to lower the VAT threshold, the last thing the self-employed need is another punitive tax grab … we urge the Government to stop tinkering with the tax system. Making such significant changes in such a short period of time is damaging British business rather than boosting it."