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Will your director and shareholder dividends be hit by the NIC increase?

Will your director and shareholder dividends be hit by the NIC increase?

Louise Hastings


Shareholder directors of owner-managed businesses normally take a minimum salary and any balance of remuneration as dividends (distribution of company profits). Historically, dividend have been taxed as unearned income and this tends to reduce National Insurance Contributions (NIC), and in some cases income tax.

The planning strategy is to pay a salary at a level that qualifies the director for state benefits, including the state pension, but does not involve payment of any NIC contributions. Directors who are first appointed during a tax year, are only entitled to a pro rata annual earnings band that depends on the actual date of appointment. Care needs to be taken in these circumstances not to incur an unexpected liability to pay NIC. Careful planning is also required to ensure that any impact of the National Living Wage regulations is considered, this may be particularly important for women who would like to claim statutory maternity benefit at some future date. 

The Treasury have decided that the recent increase of 1.25% in National Insurance rates will also apply to dividends, although not to other forms of unearned income. Although the 1.25% increase sounds insignificant, a basic rate taxpayer with £22,000 of dividend income would pay £1,750 tax in 2022-23. The equivalent tax due for 2021-22 was £1,500. The increase of £250 represents a 17% increase in tax due even though rates have only increased by 1.25 percentage points.

From April 2022, the ordinary rate, upper rate and additional rates on dividend income will be 8.75%, 33.75% and 39.35% respectively. The dividend trust rate of income tax also increased to 39.35% from April 2022 to remain in line with the additional rate. Any individual (but not a trust) who has dividend income can benefit from the tax-free dividend allowance, which has been set at £2,000 since April 2018. Dividends within the allowance are not charged to tax and this will remain the case.

You can find a summary of all tax rates in our tax rate card 2022/23.

Director/shareholders of small companies who have adopted a high dividend, low salary approach will see continuing benefits from this strategy, but fine-tuning remuneration packages to include the new rates may be beneficial. 

Directors considering their planning options for the first time as well as directors/shareholders looking to set the most tax and NIC efficient salary are welcome to contact a Moore advisor for assistance