Dividend tax – the 1.25% increase
From April 2022, dividend tax rates have increased by 1.25% across all bands. We look at the impact on your profit extraction.
To mirror the increase in National Insurance contributions, the government has also increased dividend tax rates by 1.25%. From 6 April 2022, the basic rate is 8.75%, the higher rate is 33.75%, and the additional rate is 39.35%.
For director-shareholders, this increase further narrows the tax advantage of taking dividends over salary. It is important to review your remuneration strategy to ensure it remains optimised, taking into account the new rates, the Corporation Tax increase, and the availability of the Employment Allowance.
The shrinking dividend advantage
Historically, operating through a limited company and taking a small salary (to preserve National Insurance records) topped up with dividends was highly tax-efficient. However, successive cuts to the tax-free dividend allowance and increases in the dividend tax rates have eroded this advantage. When combined with the upcoming increase in the main rate of Corporation Tax to 25%, the overall tax burden on distributed corporate profits is reaching historic highs.
Reviewing your remuneration package
With the tax landscape changing rapidly, a standard 'salary plus dividend' strategy may no longer be optimal. Business owners should consider alternative ways to extract value from their companies. This could include utilising the company to make employer pension contributions (which are free from Income Tax and National Insurance and usually deductible for Corporation Tax), providing tax-efficient benefits in kind (such as electric company cars), or leaving profits within the company to fund future growth.
The impact on investors
The dividend tax increase also affects individuals with significant investment portfolios outside of tax wrappers. For investors generating substantial dividend income, the tax drag on their returns will increase. This highlights the importance of maximising the use of ISAs, where all dividend income is completely tax-free, and considering the use of onshore or offshore investment bonds, which offer tax deferral benefits.
Disclaimer
The information contained in this article is for general guidance on matters of interest only. It should not be used as a substitute for consultation with professional accounting, tax, legal, or other competent advisers. Before making any decision or taking any action, you should consult a Kingscott Dix professional.