Dividends in 2022/23

Dividends are payments made to a shareholder out of post-tax company profits. Contractors and small company owners often take a combination of a small salary and dividends to make up their tax efficient remuneration package. Although there are other tax efficient ways of extracting funds our of a company, the purpose of this article is to explain the 2022/23 dividend rates.

The dividend allowance remains at £2,000. This means the first £2,000 of dividends taken in a tax year will not be subject to tax. However, please be aware that they do still count as income for the purposes of working out if your total income exceeds £50,000 (resulting in the partial or full clawback of child benefit), or £100,000 (resulting in the abatement of your personal allowance). So, while the actual tax rate on the first £2,000 of dividends may be 0%, one needs to be mindful of the effective tax rate created when pushing income above £50,000 or £100,000.

From 6 April 2022, the dividend tax rates have increased by 1.25%:

Dividend allowance£2,000£2,000
Basic rate tax payer8.75%7.50%
Higher rate tax payer33.75%32.50%
Additional rate tax payer39.35%38.10%

What does this mean for me?

It means a potential increase in dividend tax payments if you take no action. For some the increase may be small, for others it may be more material.

As directors without an employment contract are not subject to minimum wage rules, its important to set the right salary level to maximise corporation tax relief, use all employer and employee allowances available and ultimately ensure the most tax efficient extraction of funds from the company. Reviewing this each year will help combat increased dividend tax rates.

In addition, reviewing other tax efficient extraction methods such as pensions, electric vehicles or tax free benefits (something you should review anyway) will again offset any increase.

What works for you depends on your individual circumstances. Please feel free to contact us if you would like to find out more.