How to mitigate the dividend tax rates rises

11th October 2021

By Joanne Colwell, Partner

Our expert tax adviser looks at how you can mitigate the effects of dividend tax rates changes after the government’s recent announcement on funding Health and Social Care. Note, there will also be an autumn Budget and spending review on 27 October.

So far, Boris Johnson has announced that employees, employers and the self-employed will pay 1.25p more in the pound for National Insurance from April 2022. There will be a 1.25% increase in dividend tax rates too. Initially, the government says, the £12 billion raised per year will go towards easing pressure on the NHS, following the COVID-19 pandemic.

From April 2023, National Insurance will revert to its current rate but the extra tax will continue to be collected as a new Health and Social Care Levy. This new Levy will be payable by more people, with state pensioners who are still working required to pay it where they do not currently pay National Insurance.

In the meantime, this is what you should know about tax on dividend income. Many business owners in limited companies pay themselves some dividends (often in combination with a modest PAYE salary).

Employers should consider paying any staff bonuses before 5 April 2022 to keep the National insurance cost at current levels.

How the dividend tax rates will change

Those who pay themselves with company dividends are likely to face higher tax burdens from April 2022. Your company does not need to pay tax on dividend payments but shareholders pay Income Tax if their dividend income exceeds £2,000. Dividends on assets held in ISAs are excluded.

From the tax year 2022 – 2023, dividend tax will be charged at:

Basic rate: 8.75% instead of 7.5%.
Higher rate: 33.75% instead of 32.5%.
Additional rate: 39.35% instead of 38.1%.

This announcement followed news that Corporation Tax is also set to rise from April 2023 for many. So you will be pleased to know you can take action to reduce the impact.

Managing the situation

The key to mitigating the possible effects of these changes is to plan now. Do talk to us as we can help you but here are some suggestions:

1. Some SMEs could grant tax-advantaged share options under the EMI (Enterprise Management Incentive) employee scheme rules. It enables employers to grant share options to employees both to reward them and for tax efficiency.

You can be granted share options up to £250,000 in a three-year period and, crucially, you don’t have to pay Income Tax or National Insurance if you purchase the shares for at least the market value they had when you were granted the option.

When these shares are sold, the profit will be taxed under Capital Gains Tax (CGT), with rates that could be quite low – around 10% currently if conditions are met.

Note that not everyone can take advantage of EMI. It is open to companies with assets of £30 million or less and those working in banking, farming, property development, provision of legal services and ship building are excluded.

2. Try and pay dividends before the new rules come in – make the necessary arrangements in good time.

3. As the tax rate on directors’ loans is directly linked with the dividend tax rates it also means that company S455 tax on company dividends will increase from 32.5% to 33.75%. As such, if a director’s loan is required you should consider drawing this from the company prior to 1 April 2022.

Reminder of the rules on dividends

A dividend is a payment a company can make to shareholders if it has made a profit.

    • You cannot count dividends as business costs when you work out your Corporation Tax.
    • Your company must not pay out more in dividends than its available profits from current and previous financial years.
    • You must usually pay dividends to all shareholders.
    • To pay a dividend, you must:
      – hold a directors’ meeting to ‘declare’ the dividend
      – keep minutes of the meeting, even if you’re the only director
    • For each dividend payment the company makes, you must write up a dividend voucher showing the:
      – date
      – company name
      – names of the shareholders being paid a dividend
      – amount of the dividend
    • You must give a copy of the voucher to dividend recipients and keep a copy for your company’s records.

Please contact us if you’d like assistance with tax on dividend income or general tax matters – it will save you time and money!

About the author

Joanne qualified as a chartered tax adviser in 2005 and became a tax partner in 2018. She combines a highly technical knowledge of taxation legislation with a practical and commercial approach to problem solving. She regularly advises on the tax aspects of business restructures, mergers and demergers, research and development claims, and the implementation of share option schemes.

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