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

On 7 September, the government announced a hike in share dividend tax, which will take effect from the 2022/23 tax year. This means that if you receive income from share dividends, you could end up having to pay more tax unless you take action. Here’s what you need to know. […]

On 7 September, the government announced a hike in share dividend tax, which will take effect from the 2022/23 tax year.

This means that if you receive income from share dividends, you could end up having to pay more tax unless you take action. Here’s what you need to know.

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What is a share dividend?

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

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

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

How much is share dividend tax?

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

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

  • Basic rate taxpayers must pay 7.5% tax on share dividend income
  • Higher rate taxpayers have to pay 32.5%
  • Additional rate taxpayers pay 38.1%

Once the 1.25% rise incomes in effect, share dividends tax will increase for all taxpayers. Therefore, for the 2022/23 tax year, the dividends tax rates will be as follows:

  • Basic rate taxpayers will have to pay 8.75%
  • Higher rate taxpayers will pay 33.75%
  • Additional rate taxpayers will pay 39.35%

You can find more information on income tax bands on the gov.uk website.

Does everyone have to pay the tax?

It’s important to note that everyone gets an annual share dividend allowance of £2,000. In other words, if you receive less than £2,000 in share dividends over the tax year, you don’t have to pay any tax at all.

Also, if your sole income is from investments, then any income from tax dividends may form part of your personal tax allowance of £12,570.

So if you don’t work but receive £10,000 in dividends, you won’t have to pay share dividend tax because of this allowance. It’s also worth knowing that you’ll still qualify for the £2,000 annual share dividends allowance on top of this.

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How can I avoid share dividend tax?

If you receive dividend income above the annual share dividend allowance, and you have already maxed out your personal allowance, you needn’t be resigned to paying share dividend tax.

That’s because the tax doesn’t apply to investments held within a tax-free ISA wrapper. 

For this reason, many investors choose to invest in a stocks 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 figure will be unchanged for 2022/23.

Do note that if you don’t use your annual ISA allowance, you can’t carry it forward to the next tax year.

Why is the government increasing share dividend tax?

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

As part of these plans, the government will also increase National Insurance for the 2022/23 year. A separate ‘social care levy’ will apply from 2023/34. To discover what impact this change will have on your wallet, see our article that covers what the new health and social care levy means for you.

Ready to invest? Now you know what the new share dividends tax will mean for you, why not take a look at our top-rated Stocks and Shares ISAs?

If you’re new to investing, our investing basics guide includes everything you need to know.

The post How to (legally) avoid having to pay the new 1.25% share dividend tax appeared first on The Motley Fool UK.

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