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 ...
Thanks to the increase in the taxation of dividends, you're going to be paying more on your remuneration!
However, from April 2022, the hybrid rates for Income Tax on dividends will increase by 1.25 percent. These changes are:
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 will still be better off as they are not paying National Insurance contributions.
Any savers using tax-exempt wrappers such as ISAs will be unaffected and other savers will in general only be affected if they have a large portfolio. With yields of approximately 3.5%, you'd need a portfolio in excess of £57,000 to exceed the £2,000 limit.
"My advice would be to review your remuneration strategy!
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.
Until next time ...
HELEN BEAUMONT
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more, it may be a great idea to give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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