Dividend Tax Calculator 2021/22
In this blog we discuss the calculation to find out how much income tax you must set aside for this tax year, based on your current salary and annual dividend payments. We’ll cover the steps in the calculation and then link to some of the best calculators out there for you to use.
Dividend calculator 2021/22
Before we start looking at the actual calculation, we need to understand the terminology and what makes up the parts of the calculation.
What are dividends?
Dividends are a company’s earnings, distributed to its shareholders. The directors of a company will decide how much of the company earnings to distribute, and how often dividend payments should be made.
In a typical business, profits might be retained by
directors to be used by the company to reinvest in itself, so that it
becomes more competitive and successful in future. Sometimes, during
growth and success periods, money is available to take out of the
business and distribute to shareholders as a dividend. Sometimes the
dividend is paid not in cash, but in additional company stock.
In the situation described in the introduction, where a contractor is using a limited company for tax efficiency, there is no ongoing concern to reinvest earnings in. The sole purpose of the limited company is to receive cash from a vendor, then distribute it all back to the director and shareholder, as a salary and in dividends.
The difference between salary and dividends can be
summarised as: a salary counts as personal income, while dividends are
considered investment income. Each attracts a different tax treatment.
Dividends are a popular option for contractors, who use a limited company to manage their income. This is usually done through a low salary, high dividend strategy. They do this by setting up a limited company and then receiving their pay through that company. The salary they receive is within their tax free personal allowance and just below the threshold for NICs. The remainder of their salary is then paid as dividends.
Typically, this is the most tax efficient method for this line of work, as it significantly lowers tax and NIC liabilities.
Steps in the dividend tax calculation
If you own shares in a company and have had dividends paid by the company, you may have to pay tax.
While the tax on dividends is lower than the rate you’ll pay on money from a salary, as of 6 April 2022 the dividend tax rates have risen by 1.25%.
Important things to remember that are relevant to the calculation are:
NIC Secondary Threshold £8,840
Tax Free Personal Allowance £12,570
Dividend Tax Rates
Basic Rate 7.5% from £2,000 to £37,500
Higher Rate 32.5% from £37,501 to £150,000
Addition Rate 38.1% from £150,000+
Here’s a simple example of a dividend tax calculation 2021/2022. A director of a limited liability company takes home £58,840 over the year.
|Income||Type of Income||Income Tax Rate||Tax Liability|
|£0 - £8,840||Salary (up to NIC threshold)||0%, within tax free personal allowance||£0.00|
|Next £3,730||Dividends||0%, within tax free personal allowance||£0.00|
|Next £2,000||Dividends||0%, within tax free personal allowance||£0.00|
|Next £35,700||Dividends||Basic Rate of Dividend Tax 7.5%||£2,677.50|
|Next £8,570||Dividends||Higher Rate of Dividend Tax 32.5%||£2,785.25|
This is an illustrative calculation based on a fictional and simplified situation.
You should always structure your salary/dividends based on personal circumstances. And if you’re unsure, seek professional advice. In practice, situations like this can be complicated further by payments being made to partners, to further reduce tax liability.
Dividend tax calculations for 2021/2022 can be complicated to perform. But, with the right information to hand and some background understanding, you can make sure you plan accordingly to be able to meet your tax liabilities. There are also some good online calculators that can help.
If you’re ever unsure about how to structure your salary
and dividends, or if you need help when it comes to performing a self
assessment, you should always seek advice from professional advisors.
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