When a company make profits it often rewards its shareholders by way of a dividend payment. This article will look at Dividends and the new Health and Social Care Levy introduced from 6 April 2022. It will discuss what the tax bands are from 6 April 2022 and how you can save some tax by acting before the end of the tax year to 5 April 2022.
This article is just generic advice and we would recommend that you speak with your accountant if you are unsure what to do.
What is the Health and Social Care Levy?
The Health and Social Care Levy is an additional 1.25% tax surcharge, which will be applied to the Dividend and National Insurance tax rates in 22/23 before it becomes its own separate tax in 23/24.
| Dividend | |||
| Dividends | 21/22 | 22/23 | 23/24 |
| Basic Rate Taxpayer | 7.5% | 8.75% | 7.5% |
| Health & Social Care Levy | 1.25% | ||
| Higher Rate Taxpayer | 32.5% | 33.75% | 32.5% |
| Health & Social Care Levy | 1.25% | ||
| Additional Rate Taxpayer | 38.1% | 39.35% | 38.1% |
| Health & Social Care Levy | 1.25% | ||
| Class 1 | |||
| Employee | 21/22 | 22/23 | 23/24 |
| Basic Rate Taxpayer | 12.0% | 13.25% | 12.0% |
| Health & Social Care Levy | 1.25% | ||
| Higher & Additional Rate Taxpayer | 2.0% | 3.25% | 2.0% |
| Health & Social Care Levy | 1.25% | ||
| Class 1 | |||
| Employer | 21/22 | 22/23 | 23/24 |
| Basic, Higher & Additional Rate Taxpayer | 13.8% | 15.05% | 13.8% |
| Health & Social Care Levy | 1.25% | ||
| Class 4 | |||
| Self-employed | 21/22 | 22/23 | 23/24 |
| Basic Rate Taxpayer | 9.0% | 10.25% | 9.0% |
| Health & Social Care Levy | 1.25% | ||
| Higher & Additional Rate Taxpayer | 2.0% | 3.25% | 2.0% |
| Health & Social Care Levy | 1.25% | ||
Which taxes are affected by the Health and Social Care Levy?
The Health and Social Care Levy will only be applied to Dividends and earnings which are subject to National Insurance (Class 1, Class 1A, Class 1B and Class 4) . This therefore means that income from pensions and rents falls outside of this.
What are the tax bands?
The Income Tax bands have been frozen for the 22/23 tax year, meaning they will remain the same as the 21/22 tax year.
| Tax Bands (22/23) | Per Band | Total |
| Personal Allowance | £12,570 | £12,570 |
| Basic Rate Taxpayer | £1 – £37,700 | £50,270 |
| Higher Rate Taxpayer | £37,701 – £150,000 | £150,000 |
| Additional Rate Taxpayer | £150,001 |
* Please note at £100,000 total earnings an individual starts to lose their personal allowance. It may not be advisable to cross this threshold.
** If more than £4k is paid into your personal pension combined from both yourself and via employment you must be wary of the Pension Tax Charge.
When and how much to pay in dividends?
Provided you pay dividends on or before the 5 April 2022 you will avoid the additional 1.25% tax.
Dividends can only be paid out of profits generated in the year to the point the dividend is declared and those that have been retained in a company. If you have sufficient profits we would suggest it may be advisable to consider maximising your tax banding e.g. if you are currently a basic rate taxpayer ensure you take your dividends up to £50,270.
How to work out how much of a Dividend to pay and stay within a tax band?
To work out the maximum you can receive in dividends to stay within the desired tax banding you need to add up all earnings, which includes employment, benefits from employment, interest income, rental profits, furnished holiday let profits, and investment income (e.g. dividends, interest and PIDs). It may be difficult to establish exact values but you should be able to work out a close estimate. Then you need to deduct the banding you are looking to stay within, which will give you the optimum amount.
| Earnings | ||
| Employment income | £8,500 | |
| Interest income | £50 | |
| Dividends from investments | £150 | |
| Rental profits | £3,570 | |
| Total income pre dividends from Personal Service Company | £12,270 | |
| Stay within Basic Rate | £50,270 – £12,270 | £38,000 |
| To preserve Personal Allowance | £100,000 – £12,270 | £87,730 |
Please note if you make charitable donations to UK charities or pay into a relief at source pension scheme, which are usually personal pension schemes (not a salary sacrifice nor net pay arrangements) this will extend your tax rate bands by 100/80. E.g. a pension payment of £4,000 would mean your basic rate band will be extended by 100/80 * £4,000 = £5,000. This means you would only incur higher rates of tax once your total earnings are above £57,270 (£52,270 + £5,000).
Regarding pensions it is important to remember that your contributions are capped at your relevant earnings.
Are there any downsides by paying a larger dividend?
Paying a larger dividend sooner does save tax of 1.25% but will also bring forward the payment of tax. This can then reflect on your payments on account however these can also be reduced if you expect the dividend payment to reduce in the following year.
Assistance
If you require any assistance or further information regarding how to extract profits from your company and how the Health and Social Care Levy will impact you, please contact us. A member of our team will be happy to help.
