What is dividend tax? New increase on dividends, current UK rates and changes explained

Boris Johnson announced plans to increase dividend tax by 1.25 percentage points - the same rate as national insurance contributions
Watch more of our videos on Shots! 
and live on Freeview channel 276
Visit Shots! now

Dividend tax payments are set to rise.

Boris Johnson has confirmed plans to increase the contributions paid to the government to help with the health crisis and social care reform.

The UK prime minister set out his intentions to increase dividend tax at the same percentage points as the rise in national insurance contributions.

Hide Ad
Hide Ad

Speaking to the House of Commons, Mr Johnson acknowledged the rise in taxes was a clear breach of the Conservative Party’s 2019 manifesto.

This is what dividend tax is, how much it will rise by, when the new rates will be introduced and Mr Johnson’s reasoning in the House on 7 September 2021.

What is dividend tax?

Dividend tax is the amount of money paid to the state government when dividends are paid by a company to a person with shares in that company.

Dividends are often distributed to shareholders from the company’s profits and can be a welcome source of income to those people with shares.

Hide Ad
Hide Ad

But, much like employees earning a salary, a percentage of this money distributed by the company is paid to the government in the form of tax.

It is often lower than the rate you’ll pay from working or a pension.

The tax free dividend allowance, for the current 2021/22 financial year, is set at £2,000, before you start paying a staggered rate of tax on income.

If investments are your only source of income then you can add the tax free dividend allowance to the tax free personal allowance before having to pay tax.

Hide Ad
Hide Ad

This means you can earn £2,000 on top of £12,570 - £14,570 - before paying tax.

How much dividend tax do I pay?

Dividend tax depends on how much income and capital gains received in a year.

If you receive less than £12,570 then this falls within the personal allowance you don’t pay any tax on. If investments are your only source of income then this increases to £14,570.

  • Income up to £50,270 is within the basic rate of tax bracket, currently 7.5%
  • Income from £50,270 to £150,000 is within the higher rate tax bracket, currently 32.5%
  • Income above £150,000 is within the additional rate tax bracket, currently 38.1%

How much is dividend tax set to increase by?

Boris Johnson announced plans to increase dividend tax by 1.25 percentage points - the same rate as national insurance contributions.

Why is dividend tax increasing?

Hide Ad
Hide Ad

The dividend tax will increase to help towards clearing the NHS backlog mounted over the course of the Covid pandemic and social care reform across the UK.

  • People with assets of less than £20,000 will have their care costs covered by the government
  • People with assets between £20,001 and £100,000 will be expected to contribute to their own care, but will also receive government support
  • people with assets over £100,000 will be expected to fully fund their own care

The government stated that no-one will be expected to pay more than £86,000 for social care.

Alongside the rise in national insurance (health and social care levy from 2023), the government expects to raise £36 billion over the next three years.

The majority of this money will go towards funding the NHS to help reduce the backlog of patients and treatments and £5.4 billion will go to social care each year.

When will the increases take effect?

Hide Ad
Hide Ad

The rise in dividend tax and national insurance contributions will take effect from April 2022.

Prime minister Boris Johnson believed the tax hike was “reasonable”.

He said: “No Conservative government ever wants to raise taxes and I will be honest with the House - yes, I accept that this breaks a manifesto commitment, which is not something I do lightly.

“But a global pandemic was in no one’s manifesto and I think the people of this country understands that in their bones and they can see the enormous steps this government and the treasury have taken.

Hide Ad
Hide Ad

“After all the extraordinary actions that have been taken to protect lives and livelihoods over the last 18 months, this is the right, the reasonable and fair approach.”

A message from the editor:

Thank you for reading. NationalWorld is a new national news brand, produced by a team of journalists, editors, video producers and designers who live and work across the UK. Find out more about who’s who in the team, and our editorial values. We want to start a community among our readers, so please follow us on Facebook, Twitter and Instagram, and keep the conversation going. You can also sign up to our email newsletters and get a curated selection of our best reads to your inbox every day.

Comment Guidelines

National World encourages reader discussion on our stories. User feedback, insights and back-and-forth exchanges add a rich layer of context to reporting. Please review our Community Guidelines before commenting.