The headlines over the last few days have been dominated by the Government's plans to increase National Insurance Contribution rates by 1.25 percentage points in order to fund health and social care costs in England. Amongst all of this noise some investors may have missed that an identical increase to dividend tax rates has also been proposed. These plans were voted through the House of Commons on Wednesday night and are set to be implemented from the start of the 2022/2023 tax year (6 April 2022).
Currently investors pay tax on any dividend income that they receive based on their marginal Income Tax rate. The rates are currently 7.5% for basic rate tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate tax payers. After the increase has been applied these rates will rise to 8.75%, 33.75% and 39.35% respectively.
Investors should be aware that there is a tax free dividend allowance, which means that the first £2,000 of dividend income they receive each year is tax free. As such, some investors may find that they are unaffected by the increased tax rates if their total dividend income is less than £2,000 per annum.
For those investors with dividend income in excess of the dividend allowance, it is important to note that the dividend tax rates are only applied to dividend income received from investments held outside of tax efficient wrappers, such as ISAs and pensions. A well structured portfolio will maximise the use of different tax wrappers and annual contribution allowances to keep tax bills as low as possible.
In light of these forthcoming increases in dividend tax rates, investors should consider this as a good opportunity to review their portfolios and ensure they are invested in the most tax efficient manner possible. At Womble Bond Dickinson Wealth we have a renowned team of financial advisors who work alongside our legal and tax colleagues to ensure that our clients' portfolios are tax efficient and well placed to adapt to changing legislation such as this. If you would like to discuss your own portfolio with a member of our team, we would be pleased to hear from you.