Which although some perennial late filers welcomed and benefitted from, this simply prolonged the agony for our tax team of chasing clients and doing everything they can to get the returns submitted and avoid a penalty.
What this extension does also mean is the that the precious time in the traditional quieter months of February and March, which are earmarked for pre year end planning with clients is condensed into a much shorter period this year.
Now this isn’t a story of seeking pity and empathy for the poor tax professionals of this land but more a reminder that time passes very quickly nowadays (or is that just me getting old and seeing my children grow up into teenagers, now, that is the stuff of sympathy for all those parent taxi drivers out there traversing the streets delivering child number 1, 2, 3 to the relevant class/sports or just to be able to meet up with their friends in the park).
Back to the relevant theme of this blog, which is to highlight the increased tax rate that will be applicable to dividend income received after 6 April 2022.
Since 2016, dividends taxable within the basic rate income tax band have enjoyed the very attractive tax rate of just 7.5%. This works out as even lower than the best capital gains tax rate currently available of 10%, such that the traditional planning of retaining cash and extracting at 10% on a winding up or sale can still be trumped by such a low rate.
Added to this starting rate for dividends, every individual also gets a tax-free rate for up to £2,000 of dividend income per year.
For those receiving dividends that fall within the higher rate income tax band, the rate is 32.5% and for those with taxable income over £150,00 in a year, the rate is 38.1%.
However, all dividend tax rates are increasing by 1.25% from 6 April 2022 respectively, to 8.75%, 33.75% and 39.35%, albeit the £2k dividend allowance currently remains.
Whilst the rate increase might sound unnoteworthy to some readers, for those operating the minimum salary and dividends policy for their profit extraction this is a 17% increase in the tax rate applicable to the dividends element, adding a further £500 to the tax bill of our typical client, the owner managed business and entrepreneurs.
Helping our clients to prosper is at the heart of everything we do and as a tax adviser, I fully appreciate that everyone wants to pay less tax where they can, so do I.
Nevertheless, as I have been telling my clients for the last 12 months when posed that question, we cannot overlook that there is a large bill to pay from Covid and with taxes being the primary revenue raising tool for the Government, it is inevitable that tax rates will need to rise in the coming years.
Therefore, I am encouraging clients to consider taking extra income now and certainly before the dividend rate increases on 5 April 2022, to take advantage of the lower rates whilst they are still available.
Yes, this will crystallise a tax payment 12 months early but with the tax bill not being payable until the end of January 2023 (on a dividend declared before the start of the tax year), with inflation and interest rates on the rise you might even be able to put the extra funds into a savings account and let the banks fund your tax bill.
What is clear to me is that pre tax year end planning still has a considerable value to my clients; it is always important to review your personal circumstances with your trusted adviser so that you can indeed, pay less tax.
The next steps
For more information, please contact Ian Dickinson or your usual UHY adviser
