Similarly to the recent increase in national insurance, the government has increased dividend tax by 1.25%. (As of 06/04/2022)
If you’re wondering what this means for you, your business or just in general then we have you covered.
Today we will be breaking down what dividend tax is, why the increase is happening and why it may be the right path for you if you are a director even with the increase.
What is dividend tax?
If you are a director and own shares in a company/business you may be entitled to a share of the profits. This is known as a dividend.
Once all costs are covered including corporation tax, any company profit that is left over (known as reserves) can be paid in dividends to shareholders.
But what is dividend tax?
Well, it is a specific type of income tax that is charged on such distributions to the shareholders. You have a tax free dividend allowance (currently £2000 per annum) as well as your tax free personal allowance.
Why the increase?
Dividend tax has increased to 8.75% for a basic rate taxpayer and 33.75% for a higher rate taxpayer with effect from 6th April 2022.
As we mentioned in our article about National Insurance Changes, this increase is for the health and social care levy which is the same reason as for the national insurance increase.
It will primarily go towards the ease of NHS pressure while a portion will be moved to the social care system.
Why dividends are still the best option
Being a director/shareholder within a limited company allows you to take income through dividends. Even with the news of dividend tax increase, this is still a good option to take if you are a director.
Dividends allow for lower income tax rates compared to a salary.
As well as this, National Insurance Contributions won’t be payable on dividends whether you are an employer or employee.
Employers can remunerate through pension contributions. For example, as an employer you can contribute funds to an employee’s pension. This is deductible for the business and tax is not payable by the employer on this.
How can we help?
If you’re still a bit confused as to what this all means do not worry. On our Useful Resources tab is a number of PDF documents breaking down all aspects of tax, including National Insurance Rates and Income tax.
You can find these documents as well as many more here
If you have any further questions about this and how it affects you or your business, then feel free to get in touch and our friendly team will be happy to talk it through with you!