How to maintain tax efficiency as a small business company director of your own limited company with the impending increase in dividend tax from April 2022
From the 6th April 2022 the tax cost of drawing dividends from your limited company will increase by 1.25%
Currently, dividends are taxed on basic rate taxpayers at 7.5%, on higher rate taxpayers at 32.5% and the highest rate taxpayers are taxed at 38.1%.
The new rates will mean that basic rate taxpayers will now pay 8.75% tax on dividends, higher rate taxpayers will pay 33.75% and those paying the highest rates of tax will now pay 39.35% on their dividend income.
Tax planning for directors
Currently, the most tax efficient option for an owner/ Director is to pay themselves a salary of £8,840 and dividends of £41,430.
This takes their total income up to the basic rate threshold of £50,270 with personal tax payable on this income of £2,677 (compared to a person earning £50,270 through PAYE would be paying tax & NI of £12,424)
After the dividend tax increase the personal tax liability would be £3,124. This is a tax increase of £447.
Conclusion On The Dividend Tax Increase?
The increase of 1.25% is small enough as to not be too significant an issue for most small businesses. However, some tax planning opportunities should be considered. These could include either:
1. Maximising dividends in 2021/2022 tax year at the lower rates – so even if you don’t need the money, provided your company profits allow, you could declare the maximum dividends to keep you just within the basic rate threshold and lend the funds back to the company as working capital. This means that in future, you can withdraw these funds as needed without further tax implication and you’ve not wasted any of your unused basic rate threshold
2. Transferring dividends from investments into tax free ISAs.
Call LeeP Accountants to discuss joining us as our client for more proactive options and advice. 01733 699033