Dividend taxes are to increase in April 2022. This will affect small business owners who trade as a Limited company.
It has been well publicised in the mainstream media that National Insurance contributions are to increase by 1.25%. This increase is to pay for the increased costs of social care and will commence in April 2022.
The dividend tax increase has slightly gone under the radar but will affect many taxpayers. We go through the implications of the rate increase below.
They will apply from 6th April 2022.
All dividend rates of taxes are to increase by 1.25%. This is the same amount of increase as National Insurance Contributions.
The current dividend tax rate for a basic rate taxpayer is 7.5%. As a result of the dividend tax increase, next year dividend taxes will be 8.75% for basic rate taxpayers.
A basic rate taxpayer is someone who currently earns between £12,571 and £50,270 (tax year 2021/22).
The current dividend tax rate for a higher rate taxpayer is 32.5%. As a result of the dividend tax increase, next year dividend taxes will be 33.75% for higher rate taxpayers.
A higher rate taxpayer is someone who currently earns between £50,271 and £150,000 (tax year 2021/22).
The current dividend tax rate for an additional rate taxpayer is 38.1%. As a result of the dividend tax increase, next year dividend taxes will be 39.35% for additional rate taxpayers.
An additional rate taxpayer is someone who currently earns over £150,000 (tax year 2021/22).
Currently, regardless of total income, the first £2,000 of dividends are tax free.
As at 8th September 2021, there have been no changes announced to this tax free allowance. As a result we can only assume that the £2,000 dividend allowance will remain in 2022/23.
Dividends received from shares held in ISAs are tax free. These remain unchanged by this announcement.
Directors of small and medium sized Limited companies typically pay themselves a small salary with large dividends. We go through this in detail on our Optimum Directors Salary blog.
To summarise the salary is typically around £736 a month. This totals £8,840 per annum. This small salary is then topped up with dividends.
A Director who maximises their basic rate income would pay themselves a salary of £8,840 and dividends of £41,430.
This takes their total income up to £50,270.
The current personal tax payable on this income would be £2,677.
After the dividend tax increase the personal tax liability would be £3,124. This is a tax increase of £447.
Conclusion On The Dividend Tax Increase?
It was expected that dividend taxes would increase along with the National Insurance rates.
The increase of 1.25% is small enough as to not be too significant an issue for most small businesses. However some tax planning opportunities should be considered. These could include either:
1. Maximising dividends in 2021/2022 tax year at the lower rates.
2. Transferring dividends from investments into tax free ISAs.
Final Point: The Autumn budget is to take place on 27th October 2021. This budget could include many other tax changes. As a result, we would recommend holding off any dramatic tax planning changes until after this date.
Link to HMRC – Tax on Dividends
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