Dividend tax rate increase: 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 tax bands for 2022-23 remain the same as for 2021-22. See Tax Data Card 2021-22

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?

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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