News of increase to Dividend Tax Rates was easy overlook ... here are the key points


News of increase to Dividend Tax Rates was easy overlook

Here are the key points


Last week, as would be expected, there were lots of headlines and considerable press reporting about the government’s proposed increase in National Insurance Contributions (NICs) in connection with the new Health and Social Care Levy.

It is of course proposed that there will be a 1.25% rise in NICs from April 2022 and more information can be found at our following link - NICs rates to increase by 1.25% | Waltons Clark Whitehill | Hartlepool (waltonscw.co.uk)

However, what has failed to hit as many headlines is that the ‘1.25% additional levy’ doesn’t just apply to national insurance contributions, it is proposed that the income from share dividends, earned by those who own shares in companies, will also see a 1.25% tax increase.  This would mean that after the £2,000 tax free dividend allowance the rate of tax would be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for those with income in excess of £150,000 a year.

Details of the proposals are set out in the following document: 6.7688_CO_Command paper cover_060921 (publishing.service.gov.uk)

Many individuals operating businesses or holding investments through limited companies will also be caught by the proposed measures.

These owner managers typically withdraw income from their companies as a combination of a relatively low salary and higher amounts of dividends.  As a result, their NIC liabilities are typically quite low and would remain that way.  However, the increase in dividend tax rates will be where a more noticeable increase in tax liabilities is to be felt.

We are already seeing people think about whether to advance some dividend payments so that they fall before 6 April 2022 and therefore benefit from the current tax rates.  That is certainly worth considering but please do bear in mind and contact us before going ahead because:

  • Such action will mean that income falls into the tax year 2021/22 rather than 2022/23, resulting in the tax liability becoming payable sooner than would otherwise have been the case and impacting self-assessment payments on account.
  • Take care to consider the impact on total levels of income because if the advance results in income falling above rather than below the basic rate band, triggering the Child Benefit Charge, crossing the limit where the Personal Allowance starts to be withdrawn or falls above the limit where the Additional Higher Rate of Tax is triggered – the plan to advance income may not be tax effective.

Please don't hesitate to contact us to discuss your specific position if you want to consider how your tax position may change from April 2022.