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Business Tax  •  Personal tax  •  Tax Planning

How a cocktail of dividend allowance cuts and tax increases could affect you

By RJP LLP on 29 November 2022

The Autumn Statement contained a number of changes that have implications for higher earners,  directors of limited companies and any shareholders who earn income from those shares.

The 20% basic rate and 40% higher rate of income tax have both been frozen until 2028, together with the thresholds within which they apply. The personal allowance of £12,750 which is available in full to those with total income of up to £100,000, will also be frozen until 2028. The threshold at which the additional rate of 45% applies will however fall from £150,000 to £125,140 with effect from 6 April 2023.

Whilst the 45% additional rate of tax is now payable on all income over £125,140, the individual personal allowance has remained the same, and together with salary inflation, this means 250,000 more people will move into this highest tax bracket. As a result of this change, individuals earning over £125,140 will pay incrementally more income tax each year from 6 April 2023, with those earning £150,000 paying additional income tax of £1,243 per annum.

Turning to dividend payments; these are taxed at three levels: 8.75% where they fall within the  basic rate of tax, 33.75% where they fall within the higher rate, and 39.35% where they fall within the additional rate taxpayers. The taxation of dividend payments was not changed in the Autumn Statement, but the allowances available have been reduced.

Currently all taxpayers can receive dividend income of up to  £2,000 each tax year without paying tax on that dividend income. After April 2023, this drops to £1,000 and then again from April 2024 to £500. Even though the rates of tax are unchanged this time, as with the freezing of income tax thresholds and allowances, the reduction in the tax-free amount has the effect of increasing taxes.

How will changes to income tax and dividend allowances affect you?

Both these changes to the income tax threshold and the dividend allowance come into operation from 6 April 2023 and if you are affected, it is advisable to consider options now, before the new tax year. For instance, depending on your level of income, are you able to advance income to pay lower taxes in the current tax year? If you fall within a tax band that results in you paying unforeseen additional taxes, are you able to reduce the effect with pension contributions for example?

These decisions will depend on individual circumstances; here are some scenarios to consider:

High earning salaried employee

For the tax year 2022/23 onwards, any individual earning £125,140 or above will fall into the additional rate tax threshold. If they have dividend income, this will be taxed at the higher rate of 39.35% with only £1,000 being tax-free (and only £500 tax-free from 6 April 2024).

If you are in this situation and have some dividend allowance available in the current tax year, are you in a position to receive dividend income in the current tax year to utilise your tax free allowance of £2,000?

Limited company director

Company director/shareholders need to consider the alternatives of  bonus payments vs voting dividends. Bonuses are deductible from a company’s profits, with corporation tax relief of 19% currently, increasing to 25% in April 2023. For individuals these are subjected to tax under PAYE. Dividends are not tax deductible for the company, but the tax rates applied to dividends in the hands of the individual are lower, as above. Remember the tax rate payable on dividends will depend on the level of your total income. Depending on the level of total income, this may bring the taxpayer into the additional rate of tax and erode personal allowances.

Clearly the interaction of the changes is complex and if you are concerned about how the Autumn Statement will affect your income from 6 April 2023, please get in touch via partners@rjp.co.uk.

 

 

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