The tax payable on dividends is set to rise from 7.5% to 8.75% for basic rate taxpayers from 6th April 2022. Higher rate taxpayers will pay 33.75% on dividends and additional rate taxpayers must budget for dividend tax of 39.35%. These rates will apply to all dividends taken from all companies where the total dividend income exceeds the dividend allowance which has been held at £2,000 for 2022-23.
This tax increase is significant. A shareholder/director who takes a salary of £12,570 and dividends of £37,700 per year will see their personal tax and NIC bill increase by £442.44 in 2022-23. That is an increase in the amount of tax and NIC paid of nearly 14.5%.
If you borrow from your company and leave the loan outstanding for more than nine months after the accounting year end the company must pay a tax charge of 32.5% of the loan. This tax rate may well also increase in April 2022 to match the dividend tax rise but this is as yet unconfirmed.
Given the forthcoming changes, small business owners should consider maximising dividend extraction in this tax year which ends on 5th April 2022. Withdrawing extra dividends in this tax year will end up costing less than if done so from 6th April 2022 onwards.