Introduction
Welcome to the Tax Tips Episode for Ascentis TV, where the focus is on pre-year-end tax planning measures for individuals. The three main areas that we discuss are income tax, capital gains tax, and inheritance tax. Jumping straight into the income tax side of things, there is a big change approaching on the 6th of April 2022, which revolves around the social care levy.
The social care levy is going to add 1.25 to employee national insurance contributions and 1.25 to employer national insurance contributions. However, small business owners are not going to miss out as they often pay themselves a very small salary that does not attract any national insurance and take the vast majority of their remuneration as dividends. The government has helpfully increased dividend tax rates by 1.25 percent as well.
Currently, the first £12,570 of any individual’s income is tax-free because of the tax-free personal allowance. If you are taking income in the form of dividends, the next £2,000 is also tax-free by virtue of the dividend allowance. The next £35,700 of dividend earnings is taxed at 7.5%. If you are an employee, that’s the bracket in which you are paying 20% income tax. Of course, you do not get the dividend allowance if you are an employee or paying yourself through paye, and therefore £7,700 of your income is taxed at 20%.
The next £49,730 of income is taxed at 32.5%, or if you are an employee pay earner, it’s 40%. That takes us up to total earnings of £100,000. Once you go above £100,000, you start to lose your entitlement to the tax-free personal allowance, and that erodes at the rate of £1 for every £2 you earn above £100,000.
Rather than having a new tax threshold, there is simply an effective rate of tax for earnings between £100,000 and £125,000, which on dividends is 40% and on salaried earnings is 60%. Once you have gone through that tax bracket, the next £25,000 of earnings is subject to 32.5% on dividends and 40% on poi earnings, and that takes us up to total earnings of £150,000.
Above that, on dividends, you will pay 38.1%, and on employed pay earnings, you will pay 45% income tax. However, with the social care levy, these rates for dividend taxes are going to increase, so the 7.5% rate will go up to 8.75%, and the 32.5% rate will go up to 33.75%.
To mitigate these increases, the first thing to do is to consider whether it’s appropriate to accelerate some dividends into this income tax year before the 5th of April 2022 and pay the lower rates of dividend tax this year rather than paying something next year. This is probably something that will apply if your earnings are currently less than £50,000 and therefore you’re in the lower rates of tax. You might want to take your dividends up to the £50,000 higher rate limit to bank that 7.5% rate this year. It might also apply if you’re a higher rate payer; you may want to take your earnings right up to £100,000 and bank the rates this year.
However, generally speaking, it’s probably worth taking some advice before committing to accelerating dividends. Other things you could consider are personal pension contributions, which would extend the thresholds at which higher rates of tax apply. For example, once your earnings go with £50,000, you start to pay the higher rates
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