There has been much publicity recently about the rise in National Insurance rates, but the increase in dividend tax rates has slipped under the radar, despite its significant impact on small business owners.
Many small business owners pay themselves a combination of salary and dividend, to reduce their overall tax burden. From a tax perspective, it has historically been beneficial to take dividends, as they have attracted lower rates of tax and no National Insurance. In addition, each individual gets a tax-free dividend allowance (currently £2,000) which means that tax is only payable on dividends above this amount. This allowance is in addition to the usual personal allowance (currently £12,570 for tax year 2021/22).
Whilst dividend tax rates are lower than tax on salaries, it should be noted that dividends are taken from post-tax profits and so do not help reduce a company’s corporation tax liability, unlike salaries. Dividends can only be taken where a company has post-tax profit reserves.
In September 2021, the Government announced that in addition to the 1.25% increases to National Insurance rates, dividend tax rates would also increase by 1.25%. The revised dividend tax rates are as follows:
Basic Rate - 8.75%
Higher Rate - 33.73%
Additional Rate - 39.35%
The new rates will apply for tax years 2022/23 onwards. The increased tax will therefore need to be paid by 31 January 2024.
If you have any queries in relation to personal tax, please give our Tax Manager Melanie a call on 01244 343 504.