Dividend tax rates UK in 2022/23: A guide24 Jan 2023
As a business owner in the UK, how much money you can take from your company and put in your own pocket depends on a broad range of dividend tax rates.
When it comes to getting paid, there are a number of ways business owners can optimise their income. We’ve recently outlined the best scenarios in two guides: Salary or Dividend? and What is the most tax efficient way to extract cash from your business?
We’ll explain the procedures later if you’re not currently taking dividends as part of your earnings from your business.
But to really make the most of your take-home pay you need to be fully aware of UK dividend tax rates. Keir Wright-Whyte, Managing Director of our London accountants, has put together this article to ensure you have everything you need to understand dividend tax rates in 2022/23.
Before we get into the different rates and how they come into effect, it’s important to understand that at the start of each tax year, every individual is assigned a dividend allowance.
Dividend allowance is available to all taxpayers, regardless of the rate at which they pay tax. Further to that, the amount of dividend allowance is the same regardless of the tax bracket into which the recipient falls.
Where the allowance is not otherwise utilised, it allows for the tax-efficient extraction of profits from a family company.
Although we term it an “allowance,” the dividend is actually a zero-rate band, and it taxes dividends covered by the allowance at a rate of 0%. Significantly, dividends covered by the allowance become part of band earnings.
The dividend allowance is the value of dividends an individual can earn before they are taxed.
In 2022/23 the dividend allowance is £2,000, the same as it was for the previous tax year.
The tax you pay depends on the dividend tax rates below once you start earning above the dividend allowance.
Dividend tax rates
If you’re familiar with the dividend tax rate rise of 1.25 percent in April 2022, you’ll be glad to know that the increase got reversed in the September 2022 Mini-Budget.
They have reverted to their previous level of 7.5 percent for basic rate taxpayers and 32.5 percent for higher rate taxpayers.
The government will remove the additional dividend tax rate of 39.1 percent from 6th April 2023, in line with the removal of the additional rate of Income Tax of 45 percent on the same date.
But how do these rates apply in reality?
Well, that largely depends on your personal income allowance and how it’s used in conjunction with your dividends. For the 2022/23 tax year, personal allowance is £12,570 - this means an individual can earn up to £12,570 tax-free within the current tax year.
We would highly recommend enlisting the help of a tax accountant to ensure your calculations are accurate and tax trouble down the line doesn’t become a costly issue.
The bands are UK-wide in their application to dividend income - the Scottish income tax bands apply only to non-savings, non-dividend income.
Which dividend tax rates apply to me?
To understand which dividend tax rate applies to you, you must understand income tax rates first.
Generally speaking, the rate of income tax and subsequent amount of income tax you pay is calculated based on how much income you receive in a given tax year.
On that note, these are the income tax rates for the 2022/23 tax year:
If you get less than £12,570, this falls within the personal allowance and you won’t pay any tax.
Income between £12,570 and £50,270 is in the basic-rate tax bracket – 20%
Income between £50,270 and £150,000 is in the higher-rate tax bracket – 40%
Income above £150,000 is in the additional rate tax bracket – 45%
However, the government will change the income tax rates on 6th April 2023, following the announcement in the September 2022 Mini-Budget.
Income between £12,570 and £50,270 will be taxed at a lower basic rate - 19%
Income between £50,270 and £150,000 will continue to be taxed at the same higher rate – 40%
Income above £150,000 will no longer be taxed at an additional rate of tax of 45%. The additional rate has been abolished and any income above £150,000 will be taxed at 40%.
Example of dividend tax
In 2022/23, Individual A receives a salary of £25,000 and dividends of £30,000. Their personal allowance of £12,570 and the first £12,500 of their basic rate band is used by their salary, on which they pay a tax of £2,500.
The first £2,000 of their dividends is covered by the dividend allowance and is tax-free. However, the allowance uses up £2,000 of their basic rate band, leaving £35,250 available (£50,000 - £12,570 - £2,000).
Individual A’s £30,000 of dividends is taxed at the dividend ordinary rate of 7.5% as their earnings fall within the standard rate bracket.
Therefore, the tax payable on their dividends is £2,250 ((£2,000 @ 0%) + (£30,000 @ 7.5%)).
Paying tax on dividends
How you pay tax on dividends depends on how much you earn as dividend income.
Those who are self-employed will most likely need to use their Self Assessment to inform HMRC of dividend earnings as anything over £10,000 must be included in the individual’s tax return.
If you earn under £10,000 in dividends, you will need to contact HMRC directly, or through your accountant, and have your tax code changed.
Procedures for taking dividends
As we’ve explained, taking dividends as part of your earnings from your business can be more tax-efficient than salary alone.
To issue dividends, your company must first be making sufficient profit to cover the dividend payments. Paying dividends is illegal if you don’t. You usually pay dividends from profits after accounting for Corporation Tax.
The pool of profits available for dividend payments can grow over a period of years if you and your fellow directors choose not to distribute profits and retain them in the business.
If you decide to take dividends or issue them to other directors or shareholders, you must hold a meeting of directors and ‘declare a dividend.' You must minute that decision and retain a record of it.
You can issue dividends at any time during your financial year, and you must issue and retain copies of dividend vouchers to cover:
Your company name
Names of recipients
Amount of the dividend
Date of payment
You can then decide on the most tax-efficient way to take your earnings.
Take professional advice
Our accountants in London are always on hand to help and are experts in tax treatments under the UK tax system, including dividend tax.
Need advice on dividend tax rates? Why not get in touch with the team to discuss how our wealth of experience can help you make the right decision when it comes to dividends?
Speak to an expert
Lorraine FitzpatrickBusiness Development Director
Speak to Lorraine Fitzpatrick
Lorraine FitzpatrickBusiness Development Director
Meet Lorraine, our National Director of sales and Head of all things new business and sales.
Lorraine has experience working across a variety of sectors, from scaling her very own Mortgage Advisory Business to selling high-end care homes, gaining a wealth of knowledge in the world of property, finance, healthcare and HR.
Before joining the A+L dream team, Lorraine was responsible for running the sales department of a global HR software company, meaning she knows a thing or two about helping business owners navigate tricky times.
Outside of work you’ll find Lorraine, a self-professed ‘sunworshipper’, spending time outdoors with her children or unwinding with a generous glass of prosecco.
Drop Lorraine a line if you’d like to hear how we could help your business!