For many business owners, taking income from their company through dividends is a far more attractive way of paying a bonus. Why? Because not only are dividends taxed at a much lower rate than other forms of income, but they are also not subject to national insurance contributions (NIC).
Currently, all taxpayers are entitled to a dividend allowance of £2,000 alongside their personal allowance, which is withdrawn gradually when annual income is over £100,000. This dividend allowance applies a zero tax rate to the first slice received in the tax year. However, this is set to change.
What Will The New Dividend Allowance Be?
The Chancellor has introduced a cut in dividend allowance. For the year 2023-2024, it will be lowered to £1,000, then dropped further to £500 from the 6th of April 2024. The tax rates applicable to dividend allowance have not been changed for 2022-2023.
| Tax Year: | 2022-2023 | 2023-2024 |
|---|---|---|
| Dividend Allowance | £2,000 | £1,000 |
| Basic Rate Band | 8.75% | 8.75% |
| Higher Rate Band | 33.75% | 33.75% |
| Additional Rate Band | 39.35% | 39.35% |
In the year 2023-2024, the dividend cut will cost a basic rate taxpayer £87.50, higher rate taxpayers £337.50 and additional rate taxpayers £393.50, assuming that each uses their full allowance.