How to (legally) avoid paying the new 1.25% share dividend tax

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September In September, the government announced an increase in the share dividend tax, which will be effective from the 2022/2 tax year.

This means that if you earn income from share dividends, you will have to pay more taxes if you do not take action. Here’s what you need to know.

What is a share dividend?

A share dividend is a payment to investors who hold stock in a particular company. Dividends are often seen as a way for a business to share its profits with its shareholders.

If you own a business, you can pay dividends yourself. This is a popular option among many business owners, as it can be a nifty way to reduce the taxes payable by income tax.

For more, see our article on what share dividends are and how they work.

What is the share dividend tax?

Share dividend tax applies to shares and any income you receive from funds invested in shares.

The amount of dividend tax you pay depends on your income. For the current 2021/22 tax year, the share dividend tax rate is as follows:

  • Basic rate taxpayer Share dividends are taxed at 7.5% on earnings
  • High rate taxpayers 32.5% must be paid
  • Additional rate taxpayer Salary 38.1%

Once the 1.25% return is effective, the share dividend tax will increase for all taxpayers. Therefore, for the tax year 2022/23, the dividend tax rate will be as follows:

  • Basic rate taxpayer 8.75% to be paid
  • High rate taxpayers Will pay 33.75%
  • Additional rate taxpayer Will pay 39.35%

You can find more information about income tax bands on website.

Does everyone have to pay taxes?

It is important to note that everyone receives an annual share dividend allowance of an 2,000. In other words, if you receive less than £ 2,000 in share dividends in a tax year, you don’t have to pay any taxes.

Also, if your single income is from investments, any personal income from tax dividends can be part of your personal tax allowance of 12,570.

So if you don’t work but get a £ 10,000 dividend, you don’t have to pay share dividend tax because of this allowance. It is also worth noting that you will still be eligible for the top 2,000 annual share dividend allowance.

How can I avoid share dividend tax?

If you receive dividend income on top of the annual share dividend allowance and you have already increased your personal allowance, you do not have to resign to pay the share dividend tax.

This is because the tax does not apply to investments in tax-exempt ISA wrappers.

For this reason, many investors prefer to invest in a stock and shares ISA. Everyone gets a hefty tax-free ISA allowance, which can be spread across all types of ISA. For the current 2021/22 tax year, the ISA allowance is £ 20,000, and this number will remain unchanged for 2022/23.

Keep in mind that if you don’t use your annual ISA allowance, you won’t be able to take it to the next tax year.

Why is the government raising share dividend tax?

The government says the money raised from the dividend tax increase will go to the NHS and social care.

As part of this plan, the government will also increase national insurance for the year 2022/2. A separate ‘Social Care Levy’ will be applicable from 2023/34. To discover how this change will affect your wallet, check out our article on what new health and social care means for you.

Ready to invest? Now that you know what the new share dividend tax will mean for you, why not check out our top-rated stocks and share ISAs?

If you are new to investing, our Investment Key Guide includes everything you need to know.

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Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The content of this article is for informational purposes only. It is not the purpose of any kind of tax advice, nor does it constitute it. Readers are responsible for doing their own due diligence and seeking professional advice before making any investment decisions.

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