From April 2022, the government will be increasing the dividend tax rates by 1.25% along with the rise in National Insurance Contributions to meet its funding needs for the NHS and planned social care reforms. Continue reading as we discuss what the dividend tax rise will mean for limited company contractors.
Why has the government introduced the dividend tax rise?
The government announced on the 7th September 2021 plans to increase the dividend tax rates by 1.25%. The dividend tax rise was part of a package of measures introduced from April 2022 to contribute to the cost of social care and the NHS.
There will also be a 1.25% increase in National Insurance Contributions (NICs) from April 2022. Once HMRC systems have been updated, the new Health and Social Care Levy will be introduced as a separate tax from the NICs. The NICs will also return to their 2021/22 rates.
The government has said the move would raise £600m in extra revenue. Boris Johnson said a 1.25 percentage point increase in taxes on listed companies’ regular payouts was needed to help fund health and social care services.
What are the new Dividend Tax rates?
The new dividend tax rates, which will apply from April 2022, are as follows:
- Basic Rate Taxpayer – will increase from 7.5% to 8.75%
- Higher Rate Taxpayer – will increase from 32.5% to 33.75%
- Additional Rate Taxpayer – will increase from 38.1% to 39.35%
The tax-free dividend allowance remains unchanged for the first £2,000 of dividend income.
What do the Dividend Tax rises mean for limited company contractors?
Basic rate taxpayers
As a director of a limited company, paying yourself a salary of £8,840 and receiving dividends up to the threshold of the higher rate tax band, which is currently £50,270, the dividends would be taxed at 8.75% from April 2022.
It is important to note that:
- Your salary will not be subject to Income Tax or NICs
- The first £2,000 of dividends falls within the tax-free dividend allowance
- £3,750 falls within the £12,570 personal tax-free allowance
- The remaining £35,700 of dividends are taxed at the 8.75% basic rate, which equals £3,123.75
As a result, you could end up paying an additional £446.25 in dividend tax in the 2022/23 tax year.
Higher rate taxpayers
If you receive dividends within the higher rate band (from £50,270 – £150,000 per annum), due to the increase in dividend tax rates, for every £1,000 you receive in dividends, an extra £12.50 needs to be paid. For example, if you receive an extra £20,000 of dividends during the 2022-23 tax year, you will pay an additional £250 in higher rate dividend tax.
Additional rate taxpayers
All the dividend tax rates will rise by 1.25% for taxpayers earning over the £150,000 threshold, and the additional dividend tax rate will increase to 39.35%. This means you will pay an additional £12.50 for every £1,000 earned over £150,000.
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