Dividends

Changes in Dividend Tax

Dividends have been taxed at a lower rate for some time and taking a combination of minimum salary and then dividends has been a standard remuneration strategy for small owner managed businesses.

If you have been keeping up with announcements from Downing Street, you will know that from April 2022 the hybrid rates of Income Tax on dividends are increasing by 1.25 percentage points.

The New Rates

The changes from April 2022 are:

• The first £2,000 of dividends received are free of any additional tax charge, no change here.
• If you are a basic rate tax payer, your dividend income in excess of £2,000 will be taxed at 8.75% (presently 7.5%).
• If you are a higher rate tax payer, any dividend income that falls into the higher rate band will be taxed at 33.75% (presently 32.5%).
• If you are an additional rate tax payer, any dividend income that falls into the additional rate band will be taxed at 39.35% (presently 38.1%).

Time to Change Dividend Strategy?

Even with these increases, it is likely that director/shareholders adopting the high dividends, low salary strategy will still save on NIC costs.

Savers who have their funds in tax-exempt wrappers, ISAs for example, will be unaffected.

Other savers would need to have fairly significant portfolios outside tax exempt investments in order to pay any dividend tax. With average dividend yields running at approximately 3.5%, you would need to have a portfolio in excess of £57,000 to breach the £2,000 tax-free limit.

So, if you run a small limited company,  it still makes sense to continue taking a minimum salary and then most of your income as dividends. You will pay a little more tax on the dividends but it is unlikely that you need to change your remuneration strategy.

But by all means take advice on what works best in your situation to make sure that you are being as tax efficient as possible.