Dividend Tax Rise & Rates

The prime minister announced on 9th 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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