Dividends hit by NIC increase

Dividends are a distribution of company profits to shareholders. Historically, they have been taxed as unearned income – no National Insurance deductions.

This is still the case, but the Treasury have decided that the recent increase of 1.25% in National Insurance rates will also apply to dividends and the rates for the dividend increase are outlined below.

Since April 2016, the rates of Income Tax applicable to dividend income have been 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers, respectively.

Any individual who has dividend income can benefit from the dividend allowance which has been set at £2,000 since April 2018. Dividends within the allowance are not charged to tax and this will remain the case.

For 2021-22, the ordinary rate, upper rate and additional rate were 7.5%, 32.5% and 38.1% respectively. These rates increased by 1.25% to 8.75% 33.75% and 39.35% from April 2022.

The dividend trust rate of Income Tax was 38.1%, 2021-22. This also suffers a Dividend increase to 39.35% from April 2022 to remain in line with the additional rate.

Although the 1.25% Dividend increase sounds fairly insignificant, a basic rate taxpayer with £22,000 of dividend income would pay £1,750 tax in 2022-23. The equivalent tax due for 2021-22 was £1,500. The increase of £250 represents a 17% increase in tax due even though rates have only increased by 1.25 percentage points.

Director/shareholders of small companies who have adopted a high dividend, low salary approach will see continuing benefits from this strategy, but fine-tuning remuneration packages to include the new rates may be beneficial in the light of the dividend increase.