Paying Tax On Dividends For 22/23

Dividends can be a very convenient form of earning additional income. However, paying tax on them can seem challenging since it involves paying a different tax rate than on any other income.

The recent dividend tax increase adds another layer of confusion, even to those familiar with this process. Here we explain what dividends are, how they are taxed, who can pay them and how much taxes they are expected to pay in 2022/2023.

What Are Dividends, and Who Can Receive Them?

Dividends are payments of profit left over after the deduction for the corporate tax. Any shareholder can receive dividends, however, the total amount paid to all can’t be above the company’s bottom line in the previous financial year.

Typically, dividends are received by investors and business owners, who use them in combination with their salary. The recipients can also be employees of the company or even their relatives. Recipients are free to spend their dividend profits the way they choose, and reinvestment can be a great way to increase the benefit for the company.

How Are Dividends Taxed?

Dividend taxes are determined by a person’s total yearly income, and much of this amount is derived from dividend payments. This means that you can get paid tax-free dividends until a personal income limit.

This limit for 2022/23 is £12,570. You’ll also receive a yearly dividend allowance (£2,000) and pay taxes only for the income that goes above this limit. It isn’t necessary to pay National Insurance contributions on dividend income or after the shares from an Individual Saving Account (or ISA).

How Much Dividend Tax do You Need to Pay in 2022/23?

The amount of tax you’ll pay on dividend income above the combined allowance depends on your income tax band. This is essentially the sum of your total dividend income and all your other sources of income. Depending on your total income, this may result in paying taxes at several different tax rates.

Basic-rate taxpayers, with an income ranging between £12,571 and £50,270, in 2022/2023 are expected to pay 8.75% on dividends earned above dividend allowance. For higher-rate taxpayers, with an income between £50,271 and £150,000, this amounts to 33.75%. Whereas additional-rate taxpayers, earning £150,001 and upwards are expected to pay 39.35% on dividend taxes.

In practice, this means that if, for example, you are a basic rate taxpayer receiving £3,000 in dividends, you must pay a dividend tax for £1,000, which will be £87.50. If you are a higher rate taxpayer and take £10,000 in dividend payments, you’ll pay for £8,000 of the income and receive a dividend tax bill of £2,700.

The tax applicable for the overdrawn Directors Loan Accounts (included in the s455 CTA 2010) is also linked to the higher tax band, which means that the same increase applies to these amounts. Therefore s455 accounts will be taxed with 33.75% tax, above the allocated allowance.

Changes from Last Year

With the dividend tax system that starts from April 2022, the amounts above represent a 1.25% increase compared to the previous year. The increase is brought on as a form of support for the NHS and the Social Care system.

If using the same examples, the higher rate taxpayer will pay £100 more. While the basic rate taxpayer will pay an additional £12.50. When using the national average, there will be an increase of £150 and £403 on dividend taxes for the basic and high rates, respectively.

Paying Taxes Above and Below £10,000 in Dividends

Those earning above £10,000 in dividends will need to fill in a self-assessment tax return. This can be done together with your other tax returns. Or, if you don’t do them, you must register by 5 October for paying taxes for the previous year. You may contact an accountant for further inquiries or assistance in preparing and filing your dividend tax returns.

If you earn under £10,000 in dividends, you’ll be able to pay your taxes by having them deducted from your wages or pension. Contact HMRC and tell them you’ll be earning additional income from dividends. They will change your tax code accordingly. Or, if you are already filing self-assessment tax returns for other income, you may include the dividends in that one too.

Paying Dividends for Yourself

Most business owners opt for paying dividends for themselves quarterly, while some will prefer to do it bi-annually or annually. Although paying dividends for yourself comes with the benefits of choosing how often you want to do it, there are still some regulations to follow.

This means declaring the dividends each time you want to pay them out at the directors’ meeting, even if you are the sole director. For every payment to make to yourself, you’ll need to provide a voucher with the company’s name, its shareholders, the date of transaction and the amount you’ve paid.

Benefits of Paying Dividends

Whether you are a director at a corporation or a shareholder-employee, receiving dividends can be a very tax-efficient way to earn an income. For directors of limited companies, there is no minimum wage rate. This means they can pay as much as they like to themselves in salary. It’s not uncommon to see directors using a combination of dividends and salary to earn an income.

If your salary from the company is your only source of income, you may also opt to pay up to the National Insurance threshold and pay anything that falls above in dividends. If you have any additional income sources, or aren’t the only shareholder or director at the company, you’ll need to find other ways to combine dividends with your salary.

Conclusion

Paying tax on dividends, in general, is determined by the income they generate. The higher the income, the higher the tax rate will be. It also depends on whether you are earning the dividends as an employee at a company or paying the dividends to yourself as a director. Keep in mind that the 1.25% of increase from April 2022 applies to all tax rates, and the only exception to this rule is the tax-free dividends.