The prime minister has announced a 1.25% increase to dividend tax rates from April 2022 as part of a package of measures to fund the costs of social care and the NHS.

At a glance

The changes to Dividend tax rates will sit alongside a proposal to raise the rates of National Insurance Contributions (NICs), also by 1.25% by way of a new Health and Social Care Levy. Both measures will be included in next year’s Finance Bill.

The new dividend tax rates, which will apply across the UK, are:

 Tax band *

Proposed

from 2022-23

Current rates

Basic rate

8.75%

7.5%

Higher rate

33.75%

32.5%

Additional rate

39.35%

38.1%

 

* The 1.25% tax rise will apply to dividends above the tax bands in future years, the government has not yet provided details of the proposed tax bands for 2022-23.

The £2,000 Dividend allowance will continue to be available and dividends received by ISA’s will remain tax-free.

A knock on effect on s455?

  • Since the rate of tax which applies to overdrawn Directors loan accounts under s455 CTA 2010 is directly linked to the dividend upper rate this will mean that the s455 rate will also increase from April 2022, from 32.5% to 33.75%.

The government says that it hopes to raise £0.6bn from the raise to dividend tax rates

Examples

Basic rate taxpayer

A taxpayer with non-dividend income of £38,000 and dividend income of £12,000, based on 2021-22 tax bands.

 

Income  

PA

BR band

2022-23

BR band

2021-22      

Non-dividend income

38,000

12,570

   

Dividend

12,000

0

12,000

12,000

Totals

50,000

12,570 

12,000

12,000

Less DA

   

(2,000)

(2,000)

Taxed at 8.75%/7.5%

   

10,000

10,000

Tax due

 

 

 £875

£750

Difference

   

£125

 

 

Higher rate taxpayer

A taxpayer with non-dividend income of £88,000 and dividend income of £12,000, based on 2021-22 tax bands.

 

Income

PA

BR band

2022-23 

HR band

2022-23 

BR band

2021-22

HR band

2021-22

Non-dividend income

88,000

12,570

37,700

 37,730

37,700

 37,730

Dividend

12,000

-

-

12,000

-

12,000

Totals

100,000

12,570

37,700

49,730

37,700

49,730

Dividend in BR/HR band

   

-

12,000

-

12,000

Less DA

   

 

 (2,000)

 

 (2,000)

Dividend taxed at 33.75%/32.5%

     

10,000

 

10,000

Tax due on dividend

 

 

 

£3,375

 

£3,250

Difference

   

 

£125

 

 

 

Additional rate taxpayer

A taxpayer with a salary of £147,000 and dividend income of £25,000, based on 2021-22 tax bands.

 

Tax paid

2022-23

Tax paid

2021-22

Salary £147,000

   

£0 covered by personal allowance (lost due to income level)

-

-

£37,700 taxed at basic rate 20%

 7,540

 7,540

£109,300 taxed at higher rate 40%

 43,720

 43,720

Balance of higher rate band remaining £3,000

   

Dividend £25,000

   

£3,000 falls within higher rate band with £2,000 covered by the dividend allowance

 325

 325

£22,000 falls within the upper rate band and is taxed at 39.35%/38.1%

8,657

8,382

Total tax payable

£60,242

£59,967

Difference

£275

 

 

Useful guides on this topic

Dividend tax (subscriber guide)
This practical tax guide explains how dividends are taxed on or after 6 April 2016. It includes HMRC's own examples, more detailed examples, including an Owner Managed Business (OMB) section together with tax planning tips.

Do I pay a salary or dividend? 2021/22
This guide explores the tax-planning points and pitfalls of using dividends to create a tax-efficient pay package. 

Dividend tax: trusts
This is a guide to the impact of the new dividend tax regime on trusts and their beneficiaries.

Dividend taxation for non-UK residents
This guide considers how the introduction of the new dividend taxation legislation from 6 April 2016 affects non-UK residents who are in receipt of dividends from UK companies. 

External link

Build Back Better: Our plan for health and social care  


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