Income tax and NIC increase from 6 April 2022
As noted in our previous post (see here), income tax rates on dividend income and NIC rates are set to increase from 6 April 2022.
Whilst the current ‘cost of living crisis’ may holt these changes (pressure appears to be increasing on the government in this regard), it is also prudent to plan for the proposed changes as we are currently aware of them.
Increase in dividend rates from 6 April 2022
Under the proposals, from 6 April 2022 the rate of dividends tax will increase by 1.25% across all income tax bands.
Please find below the comparisons to the current dividend income tax rates:
| Marginal income tax band | Current dividend income tax rate* | Dividend income tax rate from 6 April 2022* |
| Basic-rate | 7.5% | 8.75% |
| Higher-rate | 32.5% | 33.75% |
| Additional-rate | 38.1% | 39.35% |
*Where dividend income exceeds the available dividend allowance and personal allowance
The dividend allowance of £2,000 will still apply, whereby the first £2,000 of dividend income is not charged to income tax. Dividend allowance is available to all taxpayers, regardless of the rate at which they pay tax. The new dividend rates will therefore apply to dividend income in excess of an individual’s £2,000 tax-free limit.
There is a small window of opportunity for clients to consider pre 6 April 2022 payment of dividends that will result in a lower rate of tax being paid. The dividend size will depend on client’s individual circumstances but as long as the dividend is treated as paid before the end of current tax year, we could be talking about significant savings.
It also may be an opportunity for limited company shareholders to consider their cash extraction strategy. Our briefing note discussing options for the current 2021/22 tax year can be found here.
This change does not affect investors receiving dividends in the ISA portfolios, as these remain tax-free.
Corporation tax rate increase – Loans to shareholders
Please also note as a side point that the dividend rate increase will also have an impact on the corporation tax charge rate (the so-called “s455 tax”) applying to outstanding loans to shareholders , where the shareholder has outstanding loan with the limited company at an accounting period end. If the loan is paid back within 9 months, there is no impact but otherwise charge at a dividend rate of 32.5% will increase to 33.75% for all loans outstanding at the year-end and not paid back within this period.
Increase in National Insurance Contributions (NIC) rates from 6 April 2022
Both employer’s and employee’s class 1 NIC rates are increasing from 6 April 2022 (as are the rates of class 1A, 1B and 4 NIC).
Given this, it would be prudent to consider making any planned bonus payments (or other discretionary salary payments) prior to 6 April 2022.
If you wish to discuss the above, please do not hesitate to contact us.