A new tax year begins on Wednesday 6 April. From this date, the tax on share dividends will increase by 1.25%. However, if you’re worried about the tax hike, don’t despair.
Here’s how you might be able to avoid share dividends tax by taking action ahead of the changes.
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What is share dividends tax?
Share dividends tax applies to dividends received on shares. It also applies to any income you pocket from funds that invest in shares.
For the current 2021/22 tax year, the dividends tax rate that applies to you depends on your income. Here’s the lowdown:
- Basic rate taxpayers pay 7.5% share dividends tax
- Higher rate taxpayers pay 32.5%.
- Additional rate taxpayers pay 38.1%.
Importantly, you only pay the above rates on any dividends above the £2,000 dividends allowance. The allowance will remain at this level for 2022/23.
How is share dividends tax changing from 6 April?
The new tax year begins on Wednesday 6 April. From this date, the share dividends tax will increase by 1.25%. So, from 2022/23, the following share dividends tax rates will apply:
- Basic rate taxpayers will have to pay 8.75%.
- Higher rate taxpayers will pay 33.75%.
- Additional rate taxpayers will pay 39.35%.
Again, these rates only apply to dividends you receive over the £2,000 tax-free allowance.
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How might you avoid the tax hike if you act now?
Taxes aren’t often easy to (legally) avoid. Yet, share dividends tax is relatively easy to dodge for most investors. That’s because, aside from the £2,000 tax-free allowance, the share dividends tax does not apply to investments held within an ISA.
For example, if you have a stocks and shares ISA and you earn dividends from it, they aren’t subject to share dividends tax. This applies even if the dividends you receive are in excess of £2,000.
So, if you currently have non-ISA investments that typically return dividends over £2,000, it’s well worth considering whether to move them into a stocks and shares ISA.
This is particularly important right now, given that the new tax year will also signify the end of the 2021/22 ISA allowance. The ‘ISA allowance’ refers to the maximum amount you can put into any type of ISA within a given tax year. If you don’t use your 2021/22 allowance before the tax year slams shut, you’ll lose it. In other words, you can’t carry it over to the 2022/23 tax year.
So, it’s possible that if you act before 5 April, you could potentially shield up to £20,000 of your investments from share dividends tax. And then, from 6 April onwards, you can put a further £20,000 into an ISA for the 2022/23 tax year. This will protect more of your investments from share dividends tax and could even see you avoid it altogether.
How else can you shield your investments from share dividends tax?
Aside from putting your investments into an ISA wrapper, share dividends tax also does not apply to investments held within a pension. So, if you have retirement savings, such as a workplace pension, you might wish to consider topping this up.
Are you looking to open an ISA before the end of the tax year? If so, take a look at The Motley Fool’s top-rated stocks and shares ISAs to find the right account for you.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
