Increases to Dividend Tax Rates for 2022/23

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16 May 2022 Advice

From April 2022, those who earn money from dividends will see their dividend tax rates rise by 1.25 percentage points, the same as the National Insurance rise. In this article, our company accountants tell you what you need to know about the dividend tax rates for 2022/23.

What is dividend tax?

If you own shares in a company, either your own company or as an investment, you may earn money in the form of a dividend payment. The tax you pay on this income is known as the dividend tax. You can earn some dividend income each year before you have to start paying tax on it.

When do you not need to pay dividend tax?

There are a few situations where you will not need to pay any dividend tax on your dividend income payments:

You don’t need to pay tax on any dividend income if it, in addition to any other sources of income, falls within your tax-free Personal Allowance of £12,570.
You also get a dividend allowance each year, meaning you only have to pay tax on any dividend income above that allowance. The dividend allowance is £2000 for the 2022-2023 tax year, unchanged from the 2021-2022 tax year. If you earn up to £2000 in dividends and no more, then you do not need to inform HMRC.
You also don’t have to pay any dividend tax on any investments within an ISA wrapper, such as dividends from shares in an ISA.

What are the new dividend tax rates for 2022/23?

The dividend tax rate you pay depends on your income tax band, but the new rates for all bands have increased by 1.25%.

Those in the basic rate income tax band (those earning between £12,570 and £50,270 per year) will now pay 8.75% dividend tax for the 2022-2023 tax year, which has increased from 7.5% in the 2021-22 tax year.

Those in the higher rate income tax band (those earning between £50,270 and £150,000 per year) will now pay 33.75% dividend tax for the 2022-2023 tax year, which has increased from 32.5% in the 2021-22 tax year.

Those in the additional rate income tax band (those earning over Â£150,000 per year) will now pay 39.35% dividend tax for the 2022-2023 tax year, which has increased from 38.1% in the 2021-22 tax year.

As above, these rates are only applicable to income earned from dividends over the dividend allowance of £2000.

How is your dividend tax calculated?

To work out how much tax you pay, HMRC starts by counting your income from work, pensions, and property, followed by your savings income, and then your dividend income, with capital gains being calculated after income tax.

For example, if you earn £30,000 from your wages and £5000 in dividends, then your total income is £35,000. Your personal allowance of £12,570 is first taken off the total to leave your taxable income, which in this case would be £22,430.

Without your dividends, that leaves £17,430 in wages to be taxed at the basic rate of 20%. Then you will remove the £2000 dividends allowance, leaving you with £3000, which you will pay 8.75% tax on.

How is dividend tax paid?

If you pay tax through your tax code, then dividends tax will be taken automatically from your wages or pension, provided the dividends earned are between £2000 and £10,000.

If you pay tax through self-assessment, you will have until 31^st January 2024 to pay the new tax rates on your dividend income from the 2022/23 tax year. You will also need to pay dividend tax via self-assessment if you earn over £10,000 in dividends. If you need any further information about the increases to the dividend tax rate in 2022/23 or assistance with any of your tax needs, please get in touch. Our expert Xero accountants in Exeter are always happy to help.

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Dan Routcliffe

Email: dan@sidaways.co.uk

Tel: 01392 360008

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