What does the dividend tax hike mean for you?

16 November 2021
1 min read
Published:

Michael Lansdell explains the new increase in dividend tax rates - and how this may affect you.

Following the increased dividend tax rates for the tax year 2022-23, business owners should consider the most effective ways to withdraw profits from their companies.

Tax rates that apply to dividends will increase across the board by 1.25 per cent, as announced by the prime minister in September. This coincides with the 1.25 per cent health and social care levy – introduced to significantly increase funding for health and social care over the next three years. The health and social care levy is expected to raise approximately £11.4 billion a year, whilst the increase in dividend tax rates will raise around £0.6 billion a year.

The new rates
From April 6, 2022, the increased dividend tax rates that apply are as follows:

  • The dividend basic rate tax will be set at 8.75 per cent (up from 7.5 per cent in the tax year 2021-2022)
  • The dividend higher rate will be set at 33.75 per cent (up from 32.5 per cent in the tax year 2021-2022)
  • The dividend additional rate tax will be set at 39.35 per cent (up from 38.1 per cent in the tax year 2021-2022).

These new dividend rates are now similar to the mainstream rates of income tax that apply to earnings from employment and self-employment, although it still usually makes sense to trade as a limited company instead of sole trader, especially since the increase in rates of national insurance on the self-employed.

Also, individual taxpayers won’t need to pay dividend tax on the first £2,000 received in dividend income – this is known as the tax-free dividend allowance. Likewise, shares held in a self-invested pension plan (SIPP) or ISAs (including Junior ISAs) will not be subjected to the dividend tax. Because the annual ISA allowance is currently £20,000, you could move £40,000 into your ISA before the end of April 2022.

Tax is constantly changing, so it’s important to understand your options in order to optimise your finances in a legal and efficient way – without falling into any pitfalls.

At Figurit, we are chartered accounts who are dedicated to offering expert advice and guidance – get in touch for more information today.

For help with business or personal tax planning, call Figurit (formerly known as Lansdell & Rose) on 020 7376 933