Dividends – distributions of a company’s profits to its shareholders – are not subject to National Insurance (NI) deductions, however, the dividend income tax rates have increased by an additional 1.25% from April 2022, the first increase to dividend tax rates since the dividend tax credit was abolished in April 2016. NI rates have also now increased by an additional 1.25%.
The increase to the NI rates was the first such increase in over 10 years and came into effect last month. This temporary (one year) increase of 1.25% is ahead of the new Health & Social Care Levy, which is set to be introduced in April 2023 at a standalone rate of 1.25%. As the increase only applies to employment and self-employment earnings, the Government made a corresponding increase of 1.25% to all dividend tax rates.
Tax resident UK individuals are entitled to a £2,000 Dividend Allowance per UK tax year; dividends within this Allowance are not charged to tax, which was already the case prior to this tax year, however, from 6 April 2022, the basic rate, higher rate, and additional rate dividend tax rates increased by 1.25%, to 8.75%, 33.75%, and 39.35%, respectively.
It is worth noting that dividend tax is not devolved to the Scottish government, meaning dividends received by Scottish taxpayers will be taxed according to the UK higher rate threshold, which is currently £50,270, compared to the Scottish threshold of £43,662, so it is possible to have a situation where you are paying higher-rate tax on employment income in Scotland, but basic rate tax on dividend income.
If you receive dividends of more than £2,000 in a tax year, you need to tell HMRC so that the correct amount of tax is paid. Unless you are required to complete a Self Assessment Tax Return for other reasons, you won’t normally need to file a Tax Return to report dividend income, unless you receive dividends of more than £10,000 in a tax year. For dividends of between £2,000 and £10,000, where you don’t complete a Tax Return already, you can usually request a tax calculation from HMRC annually.