Dividend tax increase in 2022: how does this affect investors and company directors?

A dividend tax increase will apply from April 2022, when tax on dividend income will be increased by 1.25%. This is for a social care levy, to help support the NHS and social care.

This means that investors and company directors, who are paid dividends, will have to pay more tax (above any tax-free allowances).

This dividend tax increase was announced on 7 September 2021, at the same time a 1.25% increase was confirmed for National Insurance rates (read more about the national insurance increase here).

This increase in dividend tax will affect anyone who holds investments outside of stocks and shares ISAs and has exceeded their dividend tax allowances alongside those who are company directors and pay themselves dividends above the tax-free threshold.

What is the rate of dividend tax?

Shares and income from funds that invest in shares are liable for dividend tax. For the current tax year (2020/21), a tax-free allowance of £2,000 is available, meaning you don’t need to pay tax on the first £2,000 you receive. Above this rate, tax is payable based on an individual’s tax band.

The table below shows the current rate of dividend tax and the increased rate for 2022/23 together with the current Income tax bands and income tax rates. There are currently no plans to increase income tax.

Income Tax BandIncome tax rate 2021/22Dividend Tax Rate 2021/22Dividend Tax Rate 2022/23
Basic rate20%7.5%8.75%
Higher rate40%32.5%33.75%
Additional rate45%38.1%39.35%

Why is dividend tax being increased?

Dividend taxes are being increased (as well as national insurance contributions) as a social care levy. This is initially to help funding to clear the increased NHS waiting list backlogs, exasperated by the pandemic, and will then be used to help fund social care. This is in addition to increases in council tax that may have occurred to help fund social care. Since 2016, the government introduced a rule allowing councils (where eligible) to allow additional increases of 3% above the capped increases to also fund social care.

How can I limit dividend tax on my savings or investments?

If your only income is from investments, your tax-free personal allowance can be used before you start paying tax on your dividends. This is in addition to the £2,000 dividend allowance.

Additionally, stocks and shares ISAs are not liable for dividend tax if the amount invested is within an individual’s annual allowances.

Where they are other income streams and tax is payable, it is recommended a tax review is undertaken to ensure you are only paying the correct amount of tax you ought to.

Where dividend payments are received beyond the tax-free allowances, HMRC will consider income from work, properties and pensions followed by any savings income before considering dividend income in calculating how much tax you pay. Capital gains, where applicable are considered after income tax.

Alexander & Co – expert tax advice

Our dedicated tax team can advise on all issues surrounding tax, including advising on both personal tax and corporate tax matters.

We can help to optimise exemptions and tax relief whilst making sure you remain compliant with tax rules.  Alongside dealing with dividend tax, we regularly advise clients on Income Tax, Capital Gains Tax, Inheritance tax and advise on trusts and estates as part of our holistic approach to tax advisory.

For more information on our tax services please visit our tax page here. Alternatively, you can contact our team on 0161 832 4841, email info@alexander.co.uk or complete an enquiry form here.

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