Dividends are a distribution of company profits to shareholders. Historically, they have been taxed as unearned income – no National Insurance deductions.
This is still the case, but the Treasury have decided that the recent increase of 1.25% in National Insurance rates will also apply to dividends.
Since April 2016, the rates of Income Tax applicable to dividend income have been 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers, respectively.
Any individual who has dividend income can benefit from the dividend allowance which has been set at £2,000 since April 2018. Dividends within the allowance are not charged to tax and this will remain the case.
For 2021-22, the ordinary rate, upper rate and additional rate were 7.5%, 32.5% and 38.1% respectively. These rates increased by 1.25% to 8.75% 33.75% and 39.35% from April 2022.
The dividend trust rate of Income Tax was 38.1%, 2021-22. This also increased to 39.35% from April 2022 to remain in line with the additional rate.
Although the 1.25% increase sounds fairly insignificant, a basic rate taxpayer with £22,000 of dividend income would pay £1,750 tax in 2022-23. The equivalent tax due for 2021-22 was £1,500. The increase of £250 represents a 17% increase in tax due even though rates have only increased by 1.25 percentage points.
Director/shareholders of small companies who have adopted a high dividend, low salary approach will see continuing benefits from this strategy, but fine-tuning remuneration packages to include the new rates may be beneficial.
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