As announced on 7 September 2021, the 1.25% increase in NIC contributions from April 2022 will be mirrored by a similar increase in the tax charge on dividends. From April 2022, the dividend tax increases will apply as follows:
- Basic rate taxpayers will see an increase from the present 7.5% to 8.75%.
- Higher rate taxpayers will see an increase from 32.5% to 33.75%.
- Additional rate taxpayers will see an increase from 38.1% to 39.35%.
This change will apply UK-wide. The change was confirmed at the Autumn Budget and legislated for in Finance Bill 2021-22.
The dividend tax allowance was first introduced in 2016 and replaced the old dividend tax credit with an annual £5,000 dividend allowance with tax payable on dividends received over this amount. The tax-free dividend allowance was reduced to £2,000 with effect from 6 April 2018 and has remained fixed at that level ever since. The upcoming change to the rates of Income Tax from April 2022 will be the first increase since the allowance was launched in 2016.
The dividend tax is charged on taxable dividend income an individual receives that falls outside of the personal allowance and that exceeds the dividend allowance. Taxable dividend income excludes, for example, dividends on assets held in ISAs.
According to government figures, around 59% of individuals with taxable dividend income are not expected to pay any dividend tax in 2022-23. The average loss of those affected is around £335 although there will be some additional and higher-rate taxpayers who will owe more tax.