The Spring Statement 2022 confirmed increases to National Insurance from the tax year starting 6th April 2022. The threshold for paying National Insurance increases to £12,570 from July, but this doesn’t affect the additional tax on dividends. The difference in the payment date of your dividends by just one day could mean that you pay an extra 1.25% tax next year.
If you are a shareholder of your own company you can extract profits from the business in the form of dividends. Dividends are paid to all shareholders of the same class of shares. The key thing you need to do before you declare your dividends is to bring your company accounts up to date and include a provision for Corporation Tax.
Dividends are paid out of post tax profits. The profits can be accumulated from previous years so even if you made a loss this year, you might be able to declare dividends in the current year.
You will need to have a record of management accounts showing sufficient realised post-tax profits for the total dividend you declare. You will also need board minutes or a shareholder resolution to approve minutes and a dividend voucher for each shareholder. It is important to have all these documents before you pay a dividend to prevent any challenge from HMRC and to comply with company law.
The Income Tax Act 2007 introduced 4 rates of tax on dividends including a NIL rate. The NIL rate is known as the dividend allowance. The dividend allowance for the tax year ending 5th April 2022 is £2,000. This means you don’t pay any tax on the first £2,000 of dividends in the tax year.
The rate of tax you pay on your dividends depends on the rest of your income. If you are a basic rate taxpayer you will pay 7.5% tax on dividends this year increasing to 38.1% if you reach the threshold for the additional rate. The additional rate of tax applies when your taxable income reaches £150,000
The tax on dividends will increase from 6th April 2022 as shown below.
|Tax Band - year ending||5th April 2022||5th April 2023|
|Nil rate up to £2,000||0%||0%|
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