The Government have announced a 1.25% increase to dividend tax rates which will take effect from April 6, 2022. This measure has been put in place to help to fund social care and NHS costs post-pandemic.
The dividend allowance is set to remain in place, meaning the first £2,000 of dividends will not be taxable. Dividends over and above the dividend allowance will continue to be taxed at the individual’s marginal dividend tax rate and for these purposes dividends are taxed as a top slice of income. The effect of the 1.25% increase to dividend tax rates in each tax band is as follows:
Dividends falling in the basic rate band: an increase from 7.5% to 8.75%
Dividends falling in the higher rate band: an increase from 32.5% to 33.75%
Dividends falling in the additional rate band: an increase from 38.1% to 39.35%
Close companies that make loans to shareholders or their associates are currently required to pay S455 tax at a rate of 32.5% on the amount of the loan outstanding at the end of the accounting year. The rate of S455 tax is also set to increase by 1.25% from April 2022 in line with the higher dividend tax rate.
The change to the dividend tax rate matches the 1.25% increase to Class 1 and Class 4 National Insurance Contributions (NIC) which will also take effect from April 6, 2022. Class 1 NIC applies to employers and employed individuals and Class 4 NIC applies to self-employed individuals.
Therefore, the policy objective to the dividend rate increase appears to be aimed at ensuring owner managers of limited companies that normally remunerate themselves via dividends rather than salary do not escape the increase. However, since the increase to the dividend rate applies to all dividends, investors will also be affected by the increase where dividends exceed the dividend allowance.
The incentive for individuals and partnerships to incorporate their businesses and extract profits as dividends to minimise their tax bill will reduce. Similarly, existing owner managers of limited companies may wish to revisit their profit extraction policies to ensure they are minimising their tax and NI exposure.
For more information and advice regarding these changes contact Aaron Hemmington at Hawsons Chartered Accountants on 01604 645600, email aaronhemmington@hawsons.co.uk or visit Hawsons Chartered Accountants
