How to navigate the dividend tax increase from April 2022

Dividend and National Insurance tax rates are due to increase by 1.25% on 6 April 2022 to help fund the costs of social care and the NHS. The combined tax increases are expected to raise £36billion over the next three years.

In our latest blog, we highlight what the dividend tax rise means for you as well as what you can do to minimise the impact.

 

Who will be affected by the dividend tax increase?

You can expect to pay more due to the dividend tax increase if you:

  • Are a director/shareholder who opts for a high dividend and low salary
  • Hold stocks and shares outside your ISA and have exceeded your dividend tax allowance
  • Are a contractor or freelancer with your own limited company through which you receive dividends

 

How much dividend tax will I pay?

The table below highlights the dividend tax rate changes depending on your income tax band.

Income tax bandDividend tax rate
2021/22
Dividend tax rate
2022/23
Basic rate7.5%8.75%
Higher rate32.5%33.75%
Additional rate38.1%39.35%

The first £2,000 you receive will remain tax-free (also known as the tax-free dividend allowance). There is no need to inform HMRC of your earnings if your dividends fall below this amount.

If your dividend earnings are between £2,000 and £10,000, HMRC will need to be informed. You can either ask HMRC to adjust your tax code, so the payment is taken from your salary/pension or submit a Self-Assessment tax return.

Those with dividend earnings of over £10,000 will need to complete a tax return.

 

How can I reduce the impact of the dividend tax increase?

Maximise dividends in the current tax year

Whilst the 2021/22 dividend tax rates remain lower, consider maximising your dividends before we enter the new tax year in April 2022.  Your tax on them will be accelerated but you will pay at the current rates.  Before doing this you should take care to review your total income for the current tax year and expected for next year as managing your income around the key tax rate thresholds is as important as banking the current tax rates and could be costly if you get it wrong.

Increase ISA investments

Dividends received on investments held in an ISA (e.g., stocks and shares ISA, junior ISA or a lifetime ISA) are tax free. Reduce your tax bill on dividends from your share portfolio by ensuring you take advantage of your ISA allowances and if you are able to, invest the maximum amount each year. This is currently set at £20,000 per year.

Make pension contributions

Pension contributions benefit from tax relief at the marginal rate of income tax, which can help increase your savings by 20-45%. However, it is important to remember that pension payments made over the £40,000 limit will be subject to income tax at the highest rate which you pay.

Read more about your pension allowances in our recent blog by clicking here.

Spread your taxable portfolio with your partner

If you are married or in a civil partnership, you may be able to reduce your dividend tax bill by investing as a couple and spreading your taxable portfolio whilst also ensuring you are making the most of your available reliefs and allowances.

 

Get in touch

If you would like to find out more about the dividend tax rate increase and discuss how you can reduce the impact of the rise, get in touch by contacting your usual PM+M adviser or by emailing enquiries@pmm.co.uk.

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