Having already looked at the main rules on how dividends are taxed and how those affect basic rate taxpayers. The tax on dividends can be more complex where the dividends become subject to higher rate or additional rate tax. In this article we look at the tax rates that apply for the 2021/22 and 2022/23 tax years and give some examples of how they work in practice for higher rate taxpayers and those paying tax at the additional rate (or top rate in Scotland) for the 2021/22 tax year.
Paying dividends to higher rate taxpayers
Dividends which fall into the higher rate tax band are taxed at 32.5% for the 2021/22 tax year (33.75% for the 2022/23). This includes those living in Scotland.
For the tax year 2021/22 the higher rate tax band is taxable income over £50,270 and up to £150,000 (2022/23: £50,270 to £150,000) being after taking account of the personal and any other applicable allowances.
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Paying dividends to a higher rate taxpayer 2021/22 tax year - Example 1
In 2021/22 Grace received an annual gross salary of £65,000 and also received a dividend of £12,570. Grace’s whole personal allowance and the basic rate tax band of £37,700 are used up by her salary. The remaining part of her salary and the whole of the dividend will be subject to tax at the higher rate, although the dividend allowance will reduce the amount of dividend subject to tax. The tax on the dividend is calculated as:
Dividend received £12,000
Less dividend allowance (£2,000)
Taxable dividend income £10,000
The dividend is taxed at 32.5% so the total tax payable on the dividends is £3,250 (2022/23: £3,375 as the higher rate dividend tax rate is 1.25% higher at 33.75%).
Sometimes a dividend will not fall neatly into either the basic rate or higher rate tax bands but instead span the two. In this case, part of the dividend will be subject to tax at the basic rate and part at the higher rate.
Paying dividends to a higher rate taxpayer 2021/22 tax year - Example 2
In 2021/22 Nigel is entitled to the standard personal allowance of £12,500 and receives the following gross income:
- Salary of £39,000
- Income from bank accounts (savings income) of £9,000
- Dividend income of £18,000
The salary is taxed first, which uses all of the basic rate band, ignoring the personal allowance that Nigel can use in such a manner as to achieve the lowest total tax payable. This leaves £1,300 (£39,000 – £37,700) that would be taxed at the higher rate so Nigel decides that £1,300 of his personal allowance will cover some of the salary.
Non-dividend savings income is taxed next. So that this is all subject to basic rate tax, although the savings allowance will reduce this, Nigel decides that a further £9,000 of his personal allowance will cover the savings income. This means that the salary and non-dividend savings income uses up the total basic rate tax and £10,300 of the personal allowance. This leaves £2,270 of the personal allowance for dividend income.
The dividend of £18,000 exceeds the remaining personal allowance, so £15,730 of the dividend will be subject to higher rate tax. The dividend allowance covers £2,000 of this leaving £13,730 subject to tax at the higher tax rate.
The total tax due on the dividend of £18,000 would therefore be £4,462.25 (being 32.5% of £13,730) – this will increase to £4,633.87 for 2022/23 with the increase in the higher dividend rate to 33.75%.
Splitting the personal allowance between the salary and dividend as described above results in the lowest total tax payable by Nigel. If the full personal allowance was used to cover his salary, Nigel’s total tax would be £12,374, whereas by choosing to use some to cover the dividend his total tax is reduced by £372 to £12,002. This saving will be £170 less with the increase in the higher rate for dividends for the 2022/23 tax year.
Paying dividends to additional rate taxpayers
Dividends falling into the additional rate tax band (taxable income above £150,000) are taxed at 38.1% for 2021/22 tax year, increasing to 39.35% for the 2022/23 tax year. The dividend allowance again reduces the amount of dividend subject to tax.
Dividends paid to additional rate taxpayers 2021/22 tax year - Example 1
Alan receives a salary of £155,000 in 2021/22, meaning that all his other income falls into the additional rate band. He also receives dividends of £35,000.
The first £2,000 of the dividend income is covered by the annual allowance. Therefore, based on a tax rate of 38.1%, the total tax due on the dividends is £12,573 (this will increase to £12,985.50 for the 2022/23 tax year).
It is possible that only part of a dividend will fall into the additional rate band. As well as this, the next example illustrates the way in which an individual’s entitlement to a personal allowance is eroded if their income is above £100,000.
Tax on dividends paid to additional rate taxpayers 2021/22 tax year - Example 2
In 2021/22 Xavier receives dividends of £175,000. He has no other income.
Ordinarily, Xavier would be entitled to the standard personal allowance of £12,570. However, for every £2 of income above £100,000, the personal allowance available to him is reduced by £1. That means the personal allowance is completely eroded once an individual’s income exceeds £125,140. Xavier therefore has no entitlement to a personal allowance and all his dividend income is taxable, as follows:
- £37,700 of dividend income falls in the basic rate band, of which £2,000 is covered by the dividend allowance, so £35,700 is taxable at 7.5% (8.75% for 2022/23 tax year).
- £112,300 of dividend income (£150,000 – £37,700) is taxable at 32.5% (33.75% for 2022/23 tax year)
- £25,000 of dividend income (£175,000 – £150,000) taxable at 38.1% (39.35% for 2022/23 tax year)
The tax due will therefore be calculated as:
£35,700 @ 7.5% = £2,827.50
£112,300 @ 32.5% = £36,497.50
£25,000 @ 38.1% = £9,525.00
Total tax due = £48,850.00
For the 2022/23 tax year the total tax due will be £51,0370.50
How to pay the additional tax due
Where dividend income falls into the higher rate and/or additional rate tax bands, the shareholder must be prepared to pay the additional tax due. Having calculated the amounts involved in the way described above, this will often mean putting part of the dividend received aside in order to meet the tax liability.
Usually, the additional tax must be paid to HMRC by 31 January following the end of the tax year in which the dividends are received, although you may have payments on account to make before then.
For those subject to self-assessment, the dividend income will need to be declared as part of your tax return. If you do not normally complete a tax return but have higher and/or additional rate tax to pay on your dividend income, you should contact HMRC via your local tax office. Unless your tax affairs have become particularly complex, you may not need to complete a full tax return.
The impact of paying dividends from your company
As the receipt of dividends can have an impact on an individual’s overall tax position you may want to take tax advice from your accountant before paying a dividend from your company. You will also want to consider the optimum mix of salary and dividends, which an accountant can also identify. It is also possible for shareholders to elect to waive dividends, although such waivers must be made before the dividend is declared. Care should be taken before electing to waive a dividend as HMRC may challenge the waiver and seek to charge tax on those waiving their dividend, especially where the size of the dividend paid was only possible because certain shareholders waived their dividend.
Not all shareholders want income on a regular basis and many investors will instead be looking for a medium to long term increase in the value of the shares. Sometimes a mixture of both is required and a strong and increasing dividend history will often have a positive impact on the company’s share price.
Before paying a dividend from your company you should see our article on how dividends are taxed and how those affect basic rate taxpayers.
Inform Direct calculates the dividend and tax credit amounts for each shareholder and produces dividend vouchers for you to send to them.
This article was first published in 2016 and is updated each year to cover changes in taxation rules and rates.
See our separate article on pre April 2016 dividends for an explanation of the tax on higher rate and additional rate taxpayers for dividends received before 6 April 2016.