A contractor’s guide to the announced dividend tax increase

Contractors have had a lot of change this year, so it’s safe to say that the unexpected increase to dividend tax rates was a bit of an unexpected (and unwanted) announcement.

In this blog we explore what’s been announced, when it’ll come into force, and how Limited Company contractors will be affected.

What’s been announced?

On September 7^th Boris Johnson announced that there will be an increase of 1.25% in the rate of dividend tax. So tax payers can expect the following increased from April 2022:

• Basic rate taxpayer: increase from 7.5% to 8.75%
• Higher rate taxpayer: increase from 32.5% to 33.75%
• Additional rate taxpayer (for those earning over £150,000): increase to 39.35%

The government is hoping that by making these changes it’ll bring in an additional £600 million per year. With these increases it’s important to also understand the impact it will have on your National Insurance (i.e. increasing from 9% to 10.25% and 2% to 3.25% if you’re a higher rate taxpayer).

How much extra can contractors expect to pay?

If your salary is £8,840 you can expect to pay an additional £450 from April 2022 onwards. This equates to the extra 1.25% on your dividends in the basic rate band.

If you take dividends in the higher rate band, you can expect to pay around an extra £12.50 per £1,000 of dividends taken in that tax band. According to a HMRC Treasury document, you can therefore expect to pay an additional £715 where you’re earning the median higher rate taxpayer income (£67,110).

Regardless of where you’ll fall in regards to your tax band, you’ll need to be considerate before the start of the new tax year as to the timing of taking a dividend, because if you do so before April 5^th 2022 it’ll result in paying a lower rate of tax. We’d advise always discussing your personal circumstances with your contractor accountant before taking out any money from your Limited Company.

Will the dividend allowance also be changing?

At present there are no indications from the government of any plans to change the current £2,000 dividend allowance. So small business owners and contractors can continue to enjoy the first £2,000 of dividends tax free.

What else is there to be aware of?

If you have National Insurance liabilities to pay for any staff you employ, you’ll also be hit by a National Insurance increase of an additional 1.25%. So for some contractors, they’ll have to pay both increases.

Many contractors feel that during the pandemic they’ve been hit hard with April 2021’s IR35 reform and also left to fend for themselves, whilst others have had access to help in the form of provisions from the government.

Whilst employees enjoyed furlough and those who are self-employed had SEISS grants, if you’re a small business owner whose income model is based on taking a low salary and topping it up with dividends, then nothing was made available to help during the pandemic.

It’s a shame that for contractors, this tax increase leaves few alternatives for the ways in which they can extract profit from their Limited Companies. It’ll be interesting what this October’s budget has in store for contractors, and how their future will look.

How can SG Accounting help?

Whilst this announcement is less than ideal for contractors, the tax rise doesn’t come into force until April 6^th 2022, so there is some time to plan your taxes accordingly in order to make the most from what’s available now. Speak to your specialist contractor accountant who will be able to advise you on your personal circumstances, and help you up until April 6^th and beyond.