To address the impact of Covid-19 and to provide additional funding for health and social care, the Government announced plans last week, to increase the rates of tax paid on dividend income.
From 6 April 2022, the tax rate applied to dividend income will increase by 1.25 percentage points across the various tax bands.
Currently, dividends are taxed on basic rate taxpayers at 7.5%, on higher rate taxpayers at 32.5% and the highest rate taxpayers are taxed at 38.1%.
The new rates will mean that basic rate taxpayers will now pay 8.75% tax on dividends, higher rate taxpayers will pay 33.75% and those paying the highest rates of tax will now pay 39.35% on their dividend income.
This tax increase will affect all UK taxpayers; the Scottish rates of tax will have no differing effect on Scottish taxpayers.
There is currently a £2,000 tax free dividend allowance whereby the first £2,000 of dividend income is disregarded for tax purposes and the new rates will therefore apply to dividend income over and above the £2,000 tax free limit. These changes are part of the Government’s paper “Building Back Better: Our Plan for Health and Social Care”. You can read the full paper here.
However, the Government’s paper does not mention whether there will be any changes to this tax free dividend allowance for the 2022/2023 tax year nor does it mention any potential changes to the basic or higher rate tax bands. The thresholds are normally left to the chancellor to announce at the budget which will take place on Wednesday 27 October.
Dividends received within an ISA will remain tax free.
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