Shareholders and directors hit by dividend tax rate rise
The government plans to increase dividend tax by 1.25 percentage points, which means investors will have to pay more on the money they get from owning company shares.
The announcement, made on 7 September, came alongside proposals for 1.25 percentage points change in National Insurance rates, and a watered down state pension increase for retirees for the 2022-23 tax year.
The hike in dividend tax will hit anyone holding investments outside of a stocks and shares ISA, investors who have exceeded their dividend tax allowance and people who run their own businesses and pay themselves dividends.
Dividend taxes are paid on shares, and income you get from funds that invest in shares on your behalf.
In the 2021-22 tax year, you won't need to pay any tax on dividend income on the first £2,000 you receive, under the tax-free dividend allowance. Above this allowance, you pay tax based on the rate you pay on your other income - known as your ‘tax band’ or sometimes called your ‘marginal tax rate’.
Basic rate taxpayers currently pay 7.5% on any dividends they get over the dividend allowance. From April 2022, this will rise to 8.75%.
For higher rate and additional rate taxpayers, this will rise to 33.75% and 39.35% respectively. Scottish taxpayers pay tax on savings and dividends based on the rest of the UK tax bands.
Affected basic rate taxpayers are expected to pay, on average, an additional £150 on their dividend income in 2022-2023. Affected higher rate taxpayers are expected to pay, on average, an additional £403 on their dividend income in 2022-2023. Additional and higher rate taxpayers are expected to contribute over 70% of the revenue from this increase in 2022-2023.
the government says that due to the combination of the tax free dividend allowance and the personal allowance, around 60% of individuals with dividend income outside of ISA’s aren't expected to pay dividend tax and aren't expected to be affected by the changes in 2022-23.
Limited company owners – how do they feel the impact of the dividend tax rise?
Those who own their own limited company are likely to feel the biggest hit from the changes to dividend tax as some will pay themselves in the form of dividends from any company profits, whether in addition to or rather than a salary, which provides a saving on tax.
The current, and new, rates of dividend tax are at least 5% lower than the comparable rest of UK income tax band.
Business owners could also see the 1.25% National Insurance contribution (later the health and social care levy) charged for money they take as a salary and may face a charge as both the employee and the employer.