Summary of the planned dividend taxation and what to do about it.
September 13, 2021 8:51 am
The repercussions of the COVID pandemic have been catastrophic. First and foremost, on the lives of the families who have sadly lost loved ones but also to many industries throughout the world, in particular the hospitality industry that is still yet to re-find its feet.
As we know the UK government implemented measures and initiatives to support the NHS, help support employers, employees and the self employed individuals throughout the country. From mandatory lockdowns, the furlough scheme and self employed grants to business bounce back loans and reduced VAT rates for the retail and hospitality industry, the financial implications cannot be understated. Clearly, the astronomical amount of money spent to fund these measures needs to be repaid……somehow.
One way the PM has decided to do this is to raise the dividend tax rate by 1.25% with the aim to use this to help fund health and social care services with initial figures suggesting that it could raise as much as £600m a year, a sum of money that can go along way.
The planned increase is set for the 2022/23 tax year and will see dividend tax rates rise from the current:
In an aim to start to equalize the tax positions of company directors and the employed, in 2018 we saw the reduction in the dividend allowance (the amount of dividends we can receive tax free) from £5,000 to £2,000 which increased the tax for those directors who were able to pay themselves low salaries (within the tax-free personal allowance) and higher dividends and therefore pay lower amounts of income tax overall.
A rise in tax is never welcomed however when we look at it in more detail, in truth the above increases only really become costly for those with significant portfolios outside of ISA and Pensions where dividends are tax free.
The government suggests that of those people who receive income via dividends outside of ISA’s, 60% of them will not see a rise in taxation in April next year. *
So, what’s the solution? Well, more of the same in all honesty. To maximise tax efficiency for clients needing an income from their investments, advisers should continue to make sure their clients are making use of all of the available allowances they have, e.g. the £12,570 Personal Allowance, £2,000 Dividend Allowance, £12,300 capital gains allowance, £20,000 ISA allowance and £40,000 Annual Allowance.