Since April 2016, the rates of Income Tax applicable to dividend income have been 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers respectively. Any individual who has dividend income can benefit from the dividend allowance which has been set at £2,000 since April 2018. Dividends within the allowance are not charged to tax.
This new measure increases the rates of Income Tax applicable to dividend income. Currently the ordinary rate, upper rate and additional rate are 7.5%, 32.5% and 38.1% will increase each rate by 1.25% to 8.75% 33.75% and 39.35% from April 2022.
The dividend trust rate of Income Tax is currently 38.1%. This will also be increased to 39.35% from April 2022 to remain in line with the additional rate. The dividend trust rate of Income Tax is being increased to align with the highest rate of Income Tax applicable to dividends as it has been since 2004.
In England, revenue from this increase will help to fund the new health and social care settlement announced in September 2021 with the Barnett formula applying in the normal way. It will also help to limit the incentive for individuals to set up a company and remunerate themselves via dividends, rather than as wages, to reduce their tax bill.
Many who claim to be self-employed but who are directors and operate their own limited companies often utilise dividends to reduce tax and National Insurance liabilities. This change applies the addition of the new Health and Social Care Levy to amount over the £2,000 dividend allowance.