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Dividend Tax Increase April 2022

24 - 09 - 2021

The UK Government has announced that the income tax rate on dividends will be increased as of 06 April 2022. 

Why is the dividend tax rate being raised?

 

Following the announcement of an increase in National Insurance (NI) on earnings there was criticism that the NI increase only affected employees and employers. Following the criticism the government have announced a 1.25% increase in the rates of taxation on dividends. The additional funds raised are intended to help fund the £36 billion being funded to the NHS and social care.

 

What are the new rates?

 

The new dividend rates will be as follows:

 

Banding	2022/23 Tax Rate	2021/22 Tax Rate
£0 to £2,000	0%	0%
Dividends in Basic Rate banding	8.75%	7.5%
Dividends in Higher Rate banding	33.75%	32.5%
Dividends in Additional Rate banding	39.35%	38.1%

 

Will this affect me immediately?

 

No. The increase will be effective from 06 April 2022. Each year the UK Government considers the rates and thresholds for both Income Tax and National Insurance to be applied at the beginning of a new tax year. Dividend rates have not changed since 06 April 2016.

 

Are dividends now tax inefficient?

 

No. Dividend income is not liable to National Insurance contributions. Dividends also benefit from a £2,000 nil rate above the personal allowance and have lower income tax rates within the different tax bandings.

 

For example someone receiving £45,000 per annum as follows would pay the following tax based on current income tax rates and thresholds and the new NI and dividend tax rates from 06 April 2022.

 

	Employee £	Shareholder £
Salary	45,000
Dividend		45,000
Total Income	45,000	45,000
Income Tax (2021/22 rates)	6,486	n/a
Dividend Tax (2022/23 rates)	n/a	2,663
Employees NI (2022/23 rates)	4,695	n/a
Total Deductions	11,181	2,663
Net Income	33,819	42,337

 

 

Is this increase going to affect tax years after 2022/2023?

 

The increase in the dividend tax introduced in 2022/2023 is intended to become a new tax in 2023/2024 to be called a “Health & Social Care Levy”. The Levy will be distinct from National Insurance and tax which will revert to the lower rates from April 2023. Revenue from the Levy will be ‘ringfenced’ for health and social care.  

 

Please be aware that the advice and proposals regarding tax changes in the current economic climate are constantly changing and before acting on any of the above you should check the current situation with:

 

www.gov.uk

 

If you would like to discuss any of the issues noted above please contact us on:

 

01244 625 500 or 01978 364 000

contactus@foremansllp.com

Whilst all due care and attention has been taken in the preparation of these notes no liability

can be accepted for any omission or item contained therein.

 

Foremans LLP

September 2021

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