Boris Johnson has announced a rise in National Insurance contributions and dividend tax to raise £36bn over the next three years for health and social care reform. In April 2022, the
hybrid rates of Income Tax on dividend income are increasing by 1.25 percentage points.
You can find more information on the Health and Social care changes and how they can affect your tax liabilities and contributions to care
here.
The changes from April 2022 are:
- The first £2,000 of dividends received are free of any additional tax charge, no change here. Only if your total income is more than your personal allowance and you also exceed the dividend allowance will you have to pay tax on your dividends.
- If you are a basic rate tax payer, your dividend income in excess of £2,000 will be taxed at 8.75% (presently 7.5%).
- If you are a higher rate tax payer, any dividend income that falls into the higher rate band will be taxed at 33.75% (presently 32.5%).
- If you are an additional rate tax payer, any dividend income that falls into the additional rate band will be taxed at 39.35% (presently 38.1%).
- All working adults, even those above state pension age, will pay the new health and social care levy as part of their National Insurance contributions from April 2023. Only those below the state pension age will pay this in the 22/23 tax year.
| Income tax band |
Dividend tax rate 2021-22 |
Dividend tax rate 2022-23 |
| Basic Rate |
7.5% |
8.75% |
| Higher Rate |
32.5% |
33.75% |
| Additional Rate |
38.1% |
39.35% |
With these increases, directors and shareholders adopting the high dividend, low salary strategy will still save on NIC costs, but this may change in April 2023 when the corporation tax rate is scheduled to increase to 25%, depending on whether any further changes are made to income tax rates at that time.
People who have their funds in tax-exempt bubbles (E.g. an ISA), will be unaffected.
Those saving would need to have fairly significant portfolios outside tax exempt investments in order to pay any dividend tax. With the average dividend yields running at approximately 3.5%, you are likely to need to have a portfolio in excess of £57,000 to breach the £2,000 tax-free limit, but this it will depend on what the average yield of the specific investments you hold are.
If you earn between £2,000 and £10,000 from dividend income, you’ll need to inform HMRC. The tax office can adjust your tax code so tax is taken from your salary or pension, or you can fill in a
self-assessment tax return.
If you earn more than £10,000 from dividend income you have to
complete a tax return.
For more information or for assistance with the above, please contact a
Moore (South) advisor.