What does the dividend tax hike mean for you?

Following the increased dividend tax rates for the tax year 2022-23, business owners should consider the most effective ways to withdraw profits from their companies.

Tax rates that apply to dividends will increase across the board by 1.25%, as announced by the Prime Minister in September. This coincides with the 1.25% Health and Social Care Levy – introduced to significantly increase funding for health and social care over the next three years. The Health and Social Care Levy is expected to raise approximately £11.4 billion a year, while the increase in dividend tax rates will raise around £0.6 billion a year.

The new rates

From 6 April 2022, the increased dividend tax rates that apply are as follows:

  • The dividend basic rate tax will be set at 8.75% (up from 7.5% in the tax year 2021-2022)
  • The dividend higher rate will be set at 33.75% (up from 32.5% in the tax year 2021-2022)
  • The dividend additional rate tax will be set at 39.35% (up from 38.1% in the tax year 2021-2022).

These new dividend rates are now similar to the mainstream rates of income tax that apply to earnings from employment and self-employment, although it still usually makes sense to trade as a limited company instead of sole trader, especially since the increase in rates of National Insurance on the self-employed.

Also, individual taxpayers won’t need to pay dividend tax on the first £2,000 received in dividend income – this is known as the tax-free dividend allowance. Likewise, shares held in a self-invested pension plan (SIPP) or ISAs (including Junior ISAs) will not be subjected to the dividend tax. Because the annual ISA allowance is currently £20,000, you could move £40,000 into your ISA before the end of April 2022.

Tax is constantly changing, so it’s important to understand your options in order to optimise your finances in a legal and efficient way – without falling into any pitfalls.

At Figurit, we are chartered accounts that are dedicated to offering expert advice and guidance – get in touch for more information today.

For help with business or personal tax planning, call Figurit (formerly known as Lansdell & Rose) on 020 7376 933 or complete the form below.

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