For many years, dividends have been taxed at a far lower rate. This means taking a small salary and then dividends on top has been a great remuneration strategy for small business owners ...
- Any dividends up to £2,000 are tax-free
- Should you be a basic rate taxpayer, dividends in excess of £2,000 will be taxed at 8.75%
- If you're a higher rate taxpayer, high rate band dividends are taxed at 33.75%
- Dividends that fall into the additional rate band are taxed at 39.35%
It should be noted that even with the 1.25% increase, anyone using the high dividend, low salary strategy should still save them on National Insurance contributions.
Any savers using tax-exempt wrappers such as ISAs will be unaffected though other savers will need a large portfolio to cover any additional dividend tax. With yields of approximately 3.5%, you'd need a portfolio in excess of £57,000 to exceed the £2,000 limit.
If you run a small business, then minimum salary and large dividends could still work for you, but do be aware that from April 2022, you're going to be paying a little more tax on it thanks to the increase in the taxation of dividends.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.