Dividend Tax Rise & Rates

October 4, 2021 Support 0 Comments

The prime minister announced on 9^th Sept 2021 a 1.25% Dividend Tax rise from 6 April 2022, and a rise in National Insurance Contributions (NICs) by way of a new Health and Social Care Levy. The government said the move would raise an additional £600m a year.

The new dividend tax rates, which will apply across the UK, are:

Tax band *	Proposed from 2022-23	Current rates
Basic rate	8.75%	7.5%
Higher rate	33.75%	32.5%
Additional rate	39.35%	38.1%

* The 1.25% tax rise will apply to dividends above the tax bands in future years, the government has not yet provided details of the proposed tax bands for 2022-23.

The £2,000 Dividend allowance will continue to be available and dividends received by ISA’s will remain tax-free.

Investment groups, taken aback by the unexpected increase, said it would be painful for those who rely on regular dividend payments for their income.

“Investors have had to crawl through a horrible dividend drought during Covid and were just getting back on their feet, so this will feel like a particularly nasty attack on their income,” said Sarah Coles, a personal finance analyst at wealth manager Hargreaves Lansdown.

“Given that so many of them will also have a higher national insurance bill, it deals them a double blow at a difficult time.”

A wider consequence of this is in respect of loans to participators in close companies.

The rate of tax that applies to overdrawn Directors loan accounts under section 455 CTA 2010 is directly linked to the dividend upper rate. This will mean that the s.455 rate will also increase from April 2022, from 32.5% to 33.75%.

Basic rate taxpayer

A taxpayer with non-dividend income of £38,000 and dividend income of £12,000, based on 2021-22 tax bands.

	Income	PA	BR band 2022-23	BR band 2021-22
Non-dividend income	38,000	12,570
Dividend	12,000	0	12,000	12,000
Totals	50,000	12,570	12,000	12,000
Less DA			(2,000)	(2,000)
Taxed at 8.75%/7.5%			10,000	10,000
Tax due			£875	£750
Difference			£125

A taxpayer with non-dividend income of £88,000 and dividend income of £12,000, based on 2021-22 tax bands.Higher rate taxpayer

	Income	PA	BR band 2022-23	HR band 2022-23	BR band 2021-22	HR band 2021-22
Non-dividend income	88,000	12,570	37,700	37,730	37,700	37,730
Dividend	12,000	–	–	12,000	–	12,000
Totals	100,000	12,570	37,700	49,730	37,700	49,730
Dividend in BR/HR band			–	12,000	–	12,000
Less DA				(2,000)		(2,000)
Dividend taxed at 33.75%/32.5%				10,000		10,000
Tax due on dividend				£3,375		£3,250
Difference				£125

Additional rate taxpayer

A taxpayer with a salary of £147,000 and dividend income of £25,000, based on 2021-22 tax bands.

	Tax paid 2022-23	Tax paid 2021-22
Salary £147,000
£0 covered by personal allowance (lost due to income level)	–	–
£37,700 taxed at basic rate 20%	7,540	7,540
£109,300 taxed at higher rate 40%	43,720	43,720
Balance of higher rate band remaining £3,000
Dividend £25,000
£3,000 falls within higher rate band with £2,000 covered by the dividend allowance	325	325
£22,000 falls within the upper rate band and is taxed at 39.35%/38.1%	8,657	8,382
Total tax payable	£60,242	£59,967
Difference	£275

If you have any questions, the Robinsons team are on hand to help.

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