In the Autumn Budget 2021, it was announced that Dividend Tax would be increasing by 1.25 percentage points. But what does that mean to you?
**17 November 2022 update. The Autumn Budget announced today confirms that dividend tax increases will remain in place.
Dividend tax is increasing as follows:
- Basic rate: From 7.50% to 8.75%
- Higher rate: From 32.50% to 33.75%
- Additional higher rate: From 38.10% to 39.35%
When is it increasing?
It will take effect for all dividends received by you from 6 April 2022 onwards
When do I need to pay the new dividend tax?
Dividends are declared on your personal tax return.
Any dividends received between 6 April 2022 and 5 April 2023 will need to be paid by 31 January 2024.
Dividends received between 6 April 2021 and 5 April 2022 will be taxed under the old rates, and will be due by 31 January 2023.
How much extra will I pay?
The short answer is: that depends on your other income, and your total dividends in each tax year.
Firstly everyone has a personal allowance, which is tax free, for the 2021/2022 and the 2022/2023 tax year this is £12,570.
There is also a tax free dividend allowance, which is £2,000.
So altogether, if your only income is from dividends, you could receive £14,570 before paying any tax.
Basic rate tax:
- For dividend income above £14,570, and below £50,270 you will now pay 8.75% dividend tax (previously 7.50%)
- This is basic rate dividend tax, and you will now pay £8.75 for each £1,000 dividend, instead of £7.50
Example: You receive £5,000 dividends in the basic rate tax band.
You would pay £375 dividend tax up to 5 April 2022, but £437.50 from 6 April 2022, so an extra £62.50.
Higher rate dividend tax:
For dividend income above £50,270 and below £150,000 you will now pay 33.75% instead of 32.5%
This is higher rate dividend tax, and you will now pay £33.75 for every £1,000 dividend, instead of £32.50, so an extra £1.25.
You receive £75,000 in dividends, and have no other income:
- Total tax with the new tax rates is £11,470
- Total tax under the old tax rates would have been £10,715, so you are paying £755 more tax.
Additional higher rate tax:
For dividend income above £150,000 you will now pay 39.35% instead of 38.1%
For income above £100,000 you also start to lose your personal allowance at £1 personal allowance for every £2 income over £100,000
You receive £175,000 in dividends, and have no other income:
- Total tax with the new tax rates is £50,862.
- Total tax under the old tax rates would have been £48,700 so you are paying £2,162 more tax.
I have dividends from my own company, and shares from other investments:
All dividends are taxed under the same rules.
So this includes dividends from your company, or dividends from a listed company like BT or Innocent Drinks.
I have other income, not just dividends:
Your other income will need to be factored into the total tax that you will pay.
If you have income taxed at source (like employment or pension income) this will also need to be factored in.
Dividends are treated as the top slice of your income, so taxed at the higher rates, so you have to be careful with your calculations.
What can I do to reduce my tax?
There are lots of ways to reduce your tax, including:
- Taking more dividends before 5 April 2022, to use up your allowances and old dividend tax rates.
- Look at our blog on 5 top tips to reduce your personal tax.
- Speak to a financial advisor for guidance on investments and pensions to reduce your tax.
- For example, for every £10k you invest in certain HMRC approved investments, your tax will reduce by £3,000.
- Pensions and gift aid payments increase your higher rate tax threshold, so you pay more basic rate tax, and less higher rate tax.
What else do I need to know?
National living wage and national insurance rates are also increasing.
Head to our blog on wage and NIC increases for all the info.
At the moment everyone can receive £2,000 in dividends tax free, each tax year.
The Autumn Budget announced on 17 November 2022 included changes to the dividend allowance:
- This will reduce to £1,000 in April 2023
- The dividend allowance will reduce again to £500 from April 2024
- Our calculations above don’t reflect the drop in dividend allowance.
It can be a minefield! There is a lot to think about when calculating or estimating your income tax.
Speak to a qualified accountant or tax advisor for the right advice.
Check out what else is changing from April 2022.
Get in touch with us if we can help you.
Data above relates to the 2021/2022 and 2022/2023 tax year.
The above is general guidance and should not be treated as tax advice.
Rates and allowances may change.
Please seek financial or tax advice before making any dividend or investment decisions.
Get in touch for advice tailored to your circumstances.