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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