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Preparing for the Rise in Dividend Tax Rates for Individual Shareholders of Limited Company
Individual shareholders or self-employed founders or directors who own companies in the UK are taxed on the dividends when they receive from a limited company. The dividend tax is a personal tax payable by the person who receives it and it is different from the corporation tax payable by the Company. This is because it is the limited company that pays the corporation tax on the profits it has made, whereas the individual shareholder who actually withdraws retained earnings also called distributable profit after corporation tax is called a dividend.
The difference between a dividend and a salary is that with a salary, you pay your income tax before you receive your earnings, but with dividends, you only pay your income tax under self-assessment yearly when you make a dividend income from shareholding in a limited company.
Government clamps down on business owners by hiking the dividend tax rate.
The government has increased the dividend tax rates for limited company shareholders in order to discourage people from using companies as a way of avoiding paying their full share of taxes.
What is the hike in the dividend tax rate?
The dividend tax rate for a person is usually charged according to the level of taxable income bracket. The basic, higher, and additional rates of tax on dividend income were currently 7.5%, 32.5%, and 38.1%, respectively. But from 6 April 2022, these rates have increased by 1.25% to 8.75% 33.75%, and 39.35%, respectively. The impact is certainly be felt by a limited company small business owners who pay themselves in dividends.
The tax increase is most likely to impact investors who have shares outside of an Isa, pension, or that have historic wealth that they are unable to put into an Isa.
How to prepare for Rising Dividend tax?
There are some ways to shield your portfolio from the tax hike.
- Utilize your annual £2,000 dividend allowance
- Moving money into an Isa or pension by using a year’s allowance limit
- Transferring a higher proportion of shareholding to non-working or lower-income earner spouses. This is known as “interspousal transfer’. In this way, you can use two sets of dividend allowance.
- For those with large portfolios, rebalancing the holdings can be done so that income-generating stocks and funds are prioritized within an Isa. Non-yielding growth shares or funds are kept in tax-efficient accounts. This will allow you to use two sets of dividend allowances.