The government has announced an increase of 1.25% in dividend tax rates along with the rise in NIC to meet its funding needs for NHS and social care reforms. This rise will be introduced from April 2022 across the UK expecting a combined additional annual income of 12 billion in pounds.
This according to the UK’s Prime Minister Boris Johnson is going to be the “biggest catch-up programme” the NHS has ever seen. This changed is expected to be a part of the next budget and to be legislated in the next Finance Bill.
It applies to dividends from all types of companies both publicly listed and privately owned. This implies that investors owing company shares will have to pay more on the amount they get.
Also read: Dividend Tax Calculator
Dividend tax rates
With the help of the following table, you will be able to differentiate between rates of the current year and next year under the plans based on your income tax band.
| Tax band | Current dividend rates 2021-2022 | Dividend tax rates 2022- 2023 |
|---|---|---|
| Basic Rate | 7.5% | 8.75% |
| Higher rate | 32.5% | 33.75% |
| Additional rate | 38.1% (1.25%) | 39.35% |
Who will be affected by this change?
Any Director and shareholder who have opted for a high dividend and low salary.
Any individual holding stocks and shares outside Isa and have exceeded their dividend tax allowance.
Contractors and freelancers working through their own limited company and paying themselves dividends.
How to reduce the impact of increased dividend tax
The current dividend tax allowance of £2000 will continue to be available and dividends received from shares held in Isas will also be tax-free.
According to the government, due to the dividend allowance and personal tax-free allowance, 60% of individuals with dividend income outside of ISAs are most likely not to pay any dividend tax and shall not be affected by this hike.
So, you can save on tax if you have invested in a stock and shares ISA, and if your only income is from investment then tax-free allowance can be used before you start paying dividend tax.
You need to do a reassessment of your portfolio to ensure that you make the most out of the annual contribution allowances to reduce the impact of increased dividend tax on your tax bill.
How and when to pay the dividend tax
If your dividend income is within the dividend allowance i.e. £2000, you don't need to do anything.
If your dividend income is between £2000 to £10000, you need to inform about the same to HMRC and ask them for a change to your tax code or you can file in the self-assessment form.
If your dividend income is above £10000, you will need to complete the tax return.
If you need any professional help with regards to dividend tax returns, please feel free to email us at [email protected] or on Social Media.