Dividend tax rise: how much will it cost you?

7 February 2022

The media gave plenty of attention to the new social care tax, but dividend tax?

Not so much.

Although it was billed as a ‘social care’ levy announcement, in reality, increased National Insurance (NI) will be used to cover demands on the NHS and ongoing pandemic costs. In my view, the 1.25% increase in dividend tax (from April 2022) has been introduced to balance the NI increase that employees face – employees who were unable to change their remuneration, which a business owner may be better placed to do.

The government says it hopes to raise £0.6bn from the increase in dividend tax rates.

Here are the changes that’ll apply UK-wide from 6th April 2022 for the 2022/23 tax year:

Tax band

Proposed from 2022/23

Current rates
Basic rate 8.75% 7.5%
Upper rate 33.75% 32.5%
Additional rate 39.35% 38.1%

 

UNDIVIDED ATTENTION ON DIVIDENDS

Dividends are treated differently to salary within the company’s accounts in that salaries are tax deductible for the company and reduce the amount of corporation tax payable.

At Fortus we’ve done a lot of planning for Owner Managed Business (OMB) clients where we look to increase the tax efficiency of their remuneration package. Over the years, the efficiency of this planning has somewhat reduced and the announced increase in the dividend rates narrows the gap even further.

Under current rules, there’s no NI on dividends which retains one cost saving, although it’s been suggested for many years that this may change.

What you should be doing about it

Given these increases, in situations where sufficient company profits are available, it may be advisable to pay increased dividends before the new dividend tax takes effect at the beginning of April.

In other circumstances, such as selling your company, deciding to take a higher than usual dividend could have an impact on the price you’ll be able to secure for it, but such things should be considered as part of your pre-sale planning.

The mix of remuneration can impact both an individual and a company, and it’s definitely worth reviewing the mix of income to ensure you maximise the opportunities available.

One-size-doesn’t-fit-all

In summary, this is a fairly complex change to the tax regime and every taxpayer’s individual situation will need to be evaluated in great detail. One-size most certainly doesn’t fit all. We’ve already been speaking with our clients ahead of time to look at profit projections and how the changes may impact cashflow.

Reach out to us sooner rather than later to understand the best options ahead of the change.

 

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