As well as increasing National Insurance contributions from April 2022 – the 1.25% increase announced earlier this month – the Treasury also increased the hybrid income tax rates applied to dividends received, by the same amount and from the same date.
The changes from April 2022 are:
- The first £2,000 of dividends received are free of any additional tax charge, no change here.
- If you are a basic rate tax payer, your dividend income in excess of £2,000 will be taxed at 8.75% (presently 7.5%).
- If you are a higher rate tax payer, any dividend income that falls into the higher rate band will be taxed at 33.75% (presently 32.5%).
- If you are an additional rate tax payer, any dividend income that falls into the additional rate band will be taxed at 39.35% (presently 38.1%).
These increases are unlikely to influence the present planning options available to director/shareholders of smaller companies that have adopted the high dividend, low salary approach to reduce exposure to NIC charges.
However, after tax income from dividends will reduce.
Other share owners who have their funds in tax-exempt wrappers, ISAs for example, will be unaffected by these changes.
Investors who have fairly significant portfolios outside tax exempt investments may suffer tax increases on these income sources.
With average dividend yields running at approximately 3.5%, you would need to have a portfolio in excess of £57,000 to breach the £2,000 tax-free limit.
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