National Insurance Increase Affects Dividends

As the distribution of a company's profits to shareholders, dividends have historically been taxed as unearned income which meant there were no National Insurance deductions ...

Although this is still the case, the Treasury has decided that the recent National Insurance increase of 1.25% will also now apply to dividends. From April 2016, the rate of Income Tax applied to dividend income was 7.5%, 32.5% and 38.1% for basic, higher and the additional rate of taxpayers. Individuals with dividend income benefit from the Dividend Allowance set at £2,000 since 2018.

"Dividends within the allowance are not charged to tax!"

From April 2022, the ordinary rate, upper rate and additional rate were 7.5%, 32.5% and 38.1% and these increased by 1.25% from April 2022. The dividend trust rate of Income Tax was 38.1% which also increased to remain in line with the additional rate.

Although a 1.25% dividend increase sounds pretty insignificant, basic rate taxpayers with £22,000 of dividend income would have paid £1,500 in 20221/22 and in 2022/23 it is £1,750 ... a 17% increase, even though the actual rates only increased by 1.25%.

Directors and shareholders who adopt a high dividend, low salary approach to their income will see a continued benefit from this strategy, but may need to fine-tune their remuneration package in light of these new rates.

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