Use your basic rate band
Rates of dividend tax and National Insurance Contributions (NIC) are both due to increase from 6 April 2022 by 1.25 percentage points. The main rate of Class 1 employees’ NIC will increase from 12% to 13.25% and the basic rate of dividend tax will increase from 7.5% to 8.75%
This will bite into the income you take from your company in the form of salary, bonus and dividends.
Fred is the director of his personal service company (PSC). He pays himself an annual salary of £12,570 (equal to his tax-free personal allowance (PA)) and dividends of £37,700, which use up all of his basic rate band (BRB); he thus pays no higher rate tax.
The PA and BRB are frozen for 2022/23 at the 2021/22 level, so if Fred wants to avoid paying tax at 40% or a higher rate, he can’t take any more income from his company.
In 2021/22 Fred pays £3,038 in income tax and NIC on his salary and dividends. In 2022/23 this total will rise to £3,480 – an increase in his tax bill of nearly 14.5% in one year.
If you are in a similar position to Fred, taking a modest amount of income out of your PSC, it makes sense to use all your basic rate band for the current tax year.
You can expand your basic rate band by making Gift Aid donations or personal pension contributions in this tax year.