Director shareholders who operate their own limited companies often utilise dividends to reduce their income tax and national insurance liabilities; many such individuals will remunerate themselves with a small salary to utilise their personal allowance and then additional amounts are drawn as dividends.

Additionally, any individual who has dividend income can benefit from the dividend allowance which has been set at £2,000 since 2018 where dividends within the allowance are not subject to tax.

However, from 5 April 2022 the rate of Income Tax for dividend income (which has been in place since April ’16) is changing and each of the three rates (ordinary, higher and additional) will increase by 1.25%. It is estimated that this will affect 2,555,000 individuals in the tax year to 5 April 2023. The increases are as follows:

Current

Ordinary rate   7.5%                                          

Higher rate        32.5%

Additional rate   38.1%

After April 2022

Ordinary rate     8.75%

Higher rate        33.75%

Additional rate   39.35%

The dividend trust rate of Income Tax will also increase to 39.35%.

The revenue from this increase, alongside the rises in National Insurance Contributions is said to be able to fund the new health and social care settlement announced in September 2021 (see my colleague Tim’s article for more about this). The Treasury have also said that this will help to limit individuals setting up a company for tax reasons i.e. remunerating themselves via dividends, instead of wages in order to reduce their tax bill.

How can Shaw Gibbs help? 

If you have a salary/dividend strategy in place, it is important to review this and in certain cases potentially to bring some dividends payments forwards in advance of this rate rise.

It is important to take professional advice if you are bringing dividend payments forward as this might impact on a number of areas including tapered annual allowances. 

We are able to advise on the way you can structure your salary and dividends in order to be tax efficient but honour your legal obligations, please contact me if you would like to review your circumstances.