13 October 2021

How the dividend tax increase impacts contractors and directors

Recently, Boris Johnson announced that taxes on company dividend payments will increase by 1.25% to help fund social care and cut NHS waiting lists. Effectively, individuals will see a 1.25% rise in National Insurance contributions to raise an estimated £600m in tax revenue. 

Levied on both employers and employees, the system will invariably impact self-employed, small business owners, and investors who are mostly paid via company dividends as opposed to salary.

Under the new scheme, basic rate taxpayers will pay 8.75% tax on dividends (up from 7.5%). Higher-rate taxpayers will pay 33.75% (up from 32.5%). And Additional-rate taxpayers will pay 39.35% (up from 38.1%). 

However, it’s important to remember that all individuals receive a £2,000 dividend tax-free allowance in addition to the £12,570 personal allowance (assuming you only receive income via dividends). Furthermore, dividends stored in an ISA are not taxed.

How much more tax will you have to pay?

If you are a basic-rate taxpayer who makes £4,000 in dividends, you’ll pay tax on £2,000 (subtract £2,000 dividend allowance). Take 8.75% of £2,000, and you will be liable for £175 (an increase from £150). 

If you earn £10,000 in dividends, you’ll need to pay 33.75% on £8,000 of dividends, leaving you with a tax liability of £2,700 or £100 increase in tax.

Additionally, the self-employed trader who earns £25,000 in dividends will pay 39.35% on £23,000. 

To minimise your tax liability, it’s important to think ahead. Consider depositing up to £20,000 worth of dividends into your ISA account, which is not subject to income tax, dividend tax or capital gains tax. If you have children, you can also store away up to £9,000 into a junior ISA.

If you’d like to discuss how the new dividend tax impacts you, or would like to discuss tax planning strategies, please contact Bennett Verby Accountants. We specialise in advising entrepreneurs and businesses. If you’re not sure where to start, give us a call and we’d be happy to schedule a free initial consultation. 

What else should I be thinking about?

There’s no ‘one size fits all’ solution for limited company directors. The Government measures that have been released may be useful for you depending on the size and nature of your business.

Here’s a brief list of things you could explore, which we have covered separately:

As always, we’re here to help you in these uncertain times. If you need advice about any of the above, speak to us about the ways we can help.