Dividend Tax increase from April 2022

Dividend tax is due to increase in April 2022, something which you need to be aware of if you are the director of a limited company, due to the potential impact on your business and personal income.


The change has rather slipped under the radar, being overshadowed by the well-publicised increase to National Insurance contributions to fund health and social care.


Nevertheless the increase to dividend tax is significant for limited company directors and shareholders.


1.25% increase in dividend tax


From 6th April 2022, for the duration of the 2022-23 tax year, the tax rate applied to dividend income will increase by 1.25% across the various tax bands. This is the same amount of increase as National Insurance contributions.


Increase by tax band


Currently, basic rate taxpayers pay 7.5% dividend tax on dividends above the dividend allowance. Higher rate taxpayers pay 32.5% and the highest rate taxpayers are taxed at 38.1%.


The table below shows how much these rates are set to rise from April 2022.

Thresholds

2021-22

2022-23

Personal Allowance

​£0 – £12,570

0

0

Basic Rate

£12,571 - £50,270

7.50%

8.75%

Higher Rate

£50,271 - £150,000

32.50%

33.75%

Upper Rate

​£150,001 +

38.10%

39.35%

Bear in mind, it’s not all doom and gloom for limited company directors. The dividend allowance is set to remain at £2000, which means you can still take £2000 of dividends above your personal allowance, before you are taxed.


What does this mean for you?


Directors of small and medium sized limited companies typically pay themselves a small salary and a larger amount as a dividend.


To help you, the table below shows some examples to illustrate a director or shareholder’s personal tax liability for 2022-23 where dividends are the main source of personal income.

Example 1

Example 2

Example 3

Salary

12,500.00

12,500.00

12,500.00

Dividends

20,000.00

50,000.00

87,500.00

2021-22 Tax

1,350.00

6,725.00

18,912.50

2022-23 Tax

1,575.00

7,525.00

19,981.25

Increase

225.00

600.00

1,068.75

It was generally expected that dividend tax would increase at the same time as NICs. The combined tax increases are expected to raise £36 billion to meet the rising costs of the NHS and adult social care over the next 3 years.


For further information, including tax planning advice, please talk to the team at Square!


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