Changes to Dividends
As the new tax year begins, many changes will be made to reflect the current economic climate of the United Kingdom. One such change that shall come into effect from the 6th of April 2022 is a 1.25% increase in the Income Tax rates applied to dividends.
What are Dividends?
Dividends are the payments made out to the shareholders of a company, such as directors and investors. The dividends will come from the remaining value after the Corporation Tax that is due is taken from the total profit for the period. Because of this, the total dividends issued must not exceed the company’s profits from the current, or previous, periods.
Paying Dividends
The amount that each shareholder will be paid is dependent on the number of shares in the company that they hold. The dividends they receive will be proportional to their shares.
For dividends to be paid, a directors’ meeting must be held to the payment to be declared, even if the company only has one director, and a dividend voucher must be completed. The dividend voucher will include the date, the company name, the shareholder’s name, and the amount of dividend they will be paid. Dividends are usually paid quarterly but can also be paid in other installments such as annually or bi-annually.
Many companies will choose to pay their directors through a mix of both salary and dividends. This is because National Insurance contributions are not deducted from dividends; they are more tax efficient.
The New Income Tax Rates
The rise in Income Tax is being introduced as a part of a government scheme to increase funding for the health and social care sector, after it was hit hard by the pandemic over the last two years. Please view the table below to see how your tax rate will be impacted by the increase:
| Tax Brackets | Thresholds (£)
|
Dividend Tax Rate | |
| 2021/22 | 2022/23 | ||
| Personal Allowance
(If no other income) |
0 – 12,570 | 0% | 0% |
| Basic-Rate | 12,571 – 50,270 | 7.5% | 8.75% |
| Higher-Rate | 50,271 – 150,000 | 32.5% | 33.75% |
| Additional-Rate | Exceeding 150,000 | 38.1% | 39.35% |
The £2,000 dividends allowance introduced in April 2018 will still be available, meaning that any dividends within that amount will not be subjected to any tax deductions.
The government have predicted that the average loss that will be suffered because of the increase will be around £335 for those affected but has stated more than 50% of shareholders may not even need to pay any Income Tax on their dividends as they fall within the personal allowance or dividend allowance thresholds.
If you are interested in learning about the other changes brought in with the new tax year, please refer to our previous blog.
If you require assistance or any further information about how your dividends may be affected, please do not hesitate to contact us.
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