As of the new tax year, 6th April 2022, Dividend Tax will increase, affecting limited company directors who rely on dividend income to top up their salaries.
Whilst the National Insurance Contributions increase of 1.25 per cent has been widely publicised, the rise in Dividend Tax has fallen off the radar somewhat. However, it will affect a large number of taxpayers.
All Dividend Tax rates are to increase by 1.25 per cent, in line with the rise in National Insurance Contributions.
What will the Dividend Tax rise cost a basic rate taxpayer?
The Dividend Tax rate for basic rate taxpayers has increased from 7.5 per cent to 8.75 per cent as of 6th April 2022.
A basic rate taxpayer is someone who earns between £12,571 and £50,270.
How much will the Dividend Tax rise cost a higher rate taxpayer?
The Dividend Tax rate for a higher rate taxpayer has risen from 32.5 per cent to 33.75 per cent for higher rate taxpayers.
A higher rate taxpayer is someone who earns between £50,271 and £150,000.
How much will an additional rate taxpayer pay following the Dividend Tax rise?
Additional rate taxpayers will see their Dividend Tax rate rise from 38.1 per cent to 39.35 per cent.
An additional rate taxpayer is someone who earns over £150,000.
Will the dividend allowance change?
The dividend allowance has remained at £2,000 since 6th April 2018, and is set to stay that way for the tax year 2022-2023.
Tax is only paid on dividend income above the dividend allowance. There is no tax liability on dividends from shares in an Individual Savings Account (ISA).
How much will the Dividend Tax rise cost the basic rate taxpayer?
A director who maximises their basic rate income would pay themselves a salary of £8,840, plus dividends of £41,430, taking their total income up to the basic rate maximum of £50,270. Before the Dividend Tax rise of 1.25 per cent, this would have resulted in a personal tax liability of £2,677. However, following the rise, this liability now stands at £3,214, an increase of £447.
How to pay less Income Tax?
You may be able to claim Income Tax reliefs if you are eligible for them.
If you are married or in a civil partnership, you may be able to claim Marriage Allowance to reduce your partner’s tax if your income is less than the standard Personal Allowance.
If you do not claim Marriage Allowance, and you or your partner were born before 6 April 1935, you may be able to claim Married Couple’s Allowance.
Looking for advice on optimising your income as a director? The experts at Office Assistants are here to help. Please get in touch to discuss your situation.