FINANCE
HOW TO NAVIGATE
THE DIVIDEND TAX HIKE
Investors with large portfolios may want to ensure their finances are ship shape ahead of proposed changes to dividend tax. The government has announced that from April 2022, the rate of dividend tax will increase by 1.25 percentage points. On average, affected higher-rate taxpayers are expected to pay an additional £403 on their dividend income in the 2022/23 tax year, while affected basic-rate taxpayers are expected to pay an extra £150*. There are several ways to reduce the amount of dividend tax you pay on your investments. A professional adviser can help you get started but, in the meantime, here are some of the main considerations. WHAT IS THE NEW RATE OF DIVIDEND TAX? The new rate of dividend tax is due to come into effect on April 6th 2022. As is the case currently, you won’t pay tax on dividend income that falls within your personal allowance – that’s the amount of total income you can earn each year without paying tax. For the 2021/22 tax year, the standard personal allowance is £12,570. In addition, you will only pay tax on dividend income above your annual ‘dividend allowance’ – this is currently £2,000.
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For dividends above the allowance, the rate of tax depends on your marginal income tax rate:
DIVIDEND TAX RATES Income tax band
Dividend tax rate Dividend tax rate 2021/22 2022/23
Basic rate
7.5%
8.75%
Higher rate
32.5%
33.75%
Additional rate
38.1%
39.35% Source: Gov.uk
There are several ways to minimise the impact of the dividend tax hike on your investments: MAXIMISE YOUR ISA ALLOWANCE A ny dividends you re ceive on investments held in an ISA are tax-free, so the simplest way to reduce the amount of dividend tax you pay is to maximise your ISA allowance each year. The maximum amount you can invest in ISAs each tax year is currently £20,000. This is a ‘use it or lose it’ allowance, meaning you can’t carry it forward to future tax years. Investments held inside an ISA are also free from income tax and capital gains tax, making ISAs a tax-efficient way of saving and investing.
