‘Dividend tax’ – the tax on payments made by a company to its shareholders – is to increase by 1 & ¼ percentage points from April next year, as part of a new ‘Health and Social Care Levy’.
Following last week’s announcement that both Employers’ and Employees’ National Insurance contributions (NICs) would rise by 1.25%, it’s also been revealed that dividend tax is to increase by the same amount.
The government estimates that the move – which contravenes their 2019 manifesto pledge – will raise over half a billion pounds a year to help fund NHS and social care spending amidst growing waiting lists and a backlog in procedures.
How much is dividend tax increasing by?
So we’re on the same page, a dividend is a slice of a limited company’s profits that’s given to its shareholders. If you operate your own limited company, this will include you.
The dividend income you receive as a shareholder is NOT subject to NICs – this remains the case even after this announcement.
The first £2,000 worth of dividends you receive per annum is TAX-FREE. Dividends above this threshold, which fall within the basic rate tax bracket, will get taxed at 8.75% from next year (currently 7.5%).
If you fall into the higher rate tax bracket, you’ll get taxed at 33.75% from 2022-23 (32.5% until then). Those [additional rate tax payers] earning over £150,000 will see their rate go from 38.1% to 39.35%.
In a message of reassurance to small businesses, the Prime Minister did mention in his speech that “the majority of small businesses will be protected, with 40% of all businesses paying nothing at all.”
What’s been the reaction to the government’s dividend tax increase?
Reaction on the ground has not been one of overwhelming satisfaction, to put it mildly.
Investors have described the ‘unexpected’ tax hike as a ‘kick in the teeth’ for those who rely on regular dividend payments. Particularly as it follows a sustained period of reduced company pay-outs during the COVID-19 pandemic.
That’s one of many reasons that the timing of this decision has been called into question, with another being that the plans were unveiled outside of a regulatory Budget. Not to mention its proximity to the implementation of IR35 in the private sector last April.
Furthermore, many of the workers and business owners directly affected by these changes have not benefited from much – if any – government financial support during the pandemic. For instance, limited company directors – and others deemed ineligible for SEISS – have received nothing in the way of grants, instead depending on loans and savings to keep their businesses afloat. And it’s not just the smallest business that will be affected.
In an environment that’s already struggling to recruit the right skills – and against a backdrop of inflation, uncertainty, and higher taxes – another sizable impact on businesses could be the additional pressure it places on wages.
The Danbro Group’s Managing Director, Helen Broughton MBE DL, explains why: “Employers will be adversely affected by the increase in NICs, the increase in dividend tax, and the pressure to increase wages.”
“I would have liked to see the government sit tight on the decision to raise any form of tax until the economy had begun to bounce back more strongly. My fear is that this will slow our economic recovery – reducing the amount of cash available to invest and spend.”
Contractors hit hard
As a PSC contractor – a ‘one-man band’ – it means a contribution to the ‘Health and Social Care Levy’ whether you take salary or dividends (dividends taken prior to April 2022 – assuming that is the confirmed date – will not be affected by the levy).
Umbrella contractors, meanwhile, will effectively ‘endure’ a 2.5 % tax increase, with both Employers’ and Employees’ NICs rising by 1.25% each.
Giving his reaction to the tax rises, here’s Managing Director of Danbro Accounting and Danbro Business, Neil Ormesher: “Raising NICs and dividend tax is a real blow to small businesses. Especially at a time when many are just starting on the road to recovery.”
“It’s these businesses that the government – and the country – will need to kick start the post-pandemic economic recovery and I suspect this move will not be welcomed by business owners.”
“This is the latest in a growing list of ‘tax grabs’ in recent years. And, speaking candidly, I don’t believe there’s a clear, long-term strategy from our government on tax reform.”
For online tax returns and streamlined self-assessments, visit Danbro Business today.