From April 2022, as well as an increase in the national insurance contributions, the tax on dividends also increases. An increase of 1.25% is often talked about-however this is an extra 1.25% charge, not the actual percentage increase – which in % terms is much higher.
The rates are:
• First £2000 dividend – no charge
• Basic rate taxpayer – rate was 7.5% – increases to 8.75%.
• Higher rate taxpayer – rate was 32.5% – increases to 33.75%.
• Additional rate taxpayer – rate was 38.1% – increases to 39.35%.
An example- a basic rate taxpayer with £12000 dividend would pay
• 2021/22 : £2000@0% + £10000@7.5% = £750 – equivalent to 6.25% of total dividend leaving spendable income of £12000-£750 = £11250.
• 2022/23 : £2000@0% + £10000@8.75% = 875 – equivalent to 7.29% of total dividend leaving spendable income of £12000-£875 = £11125.
The net effect is therefore that spendable income will be reduced.
If there are investments generating dividend income outside of the business e.g., from a share or unit trust portfolio, consideration could be given to using ISAs to hold these investments as dividends are tax free in an ISA.
