Dividend tax hike, but pension funds and ISAs exempt

by John Wilson   •  
Research

In a statement on 7 September, the Prime Minister announced plans to substantially increase funding for health and social care over the next three years, to be funded by a new tax: the Health and Social Care Levy.

The Health and Social Care Levy will apply to employees and employers liable for Class 1 NICs and self-employed individuals liable for Class 4 NICs. It will be introduced from April 2022.

In 2022-23, given the time it takes to prepare HMRC systems, that will be done through an increase in NICs rates by 1.25 per cent.

Once systems have been updated in 2023-24, a formal legal surcharge of 1.25 per cent will replace the increase in NICs rates and apply to those working above State Pension age; the underlying NICs rates will return to their previous level.

It was also announced that, from April 2022, all rates of dividend tax will increase by 1.25 per cent. This change will apply UK-wide. It will be legislated for in the next Finance Bill.

Dividend Tax Rates

 

Basic Rate

Higher Rate

Additional Rate

Current dividend tax rates (2021-22)

7.5%

32.5%

38.1%

2022-23 dividend tax rates

8.75%

33.75%

39.35%

Dividend tax is charged on taxable dividend income an individual receives that falls outside of the personal allowance (£12,570 in 2021-22) and the dividend allowance (£2,000 in 2021-22). Taxable dividend income excludes, for example, dividends on assets held in ISAs.

What was not clear from the statement on 7 September was the implications of the change to dividend tax on pension funds*.

Since the statement, however, it is now understood that the Treasury has confirmed the extra dividend tax will not pension funds. This confirmation is also consistent with the revenue estimates that were published at the time of the statement.

The implications for pensions will be checked when the Finance Bill is published but, meantime, it is assumed the pension funds are not affected.

 

* A registered pension scheme's investment returns are normally exempt from income tax and capital gains tax. Until the 1997 budget announcement by the then Chancellor Gordon Brown, pension funds received a tax credit of 20% on dividends received from UK companies on their shareholdings. Recipients of the dividend were considered to have already paid basic rate tax on their dividend income, but as pension funds were exempt from the income tax regime they were often entitled to claim this back as a tax credit. This regime was abolished with effect from 6 April 1999, so pension funds are no longer able to reclaim tax from HMRC in respect of dividends received from their shareholdings of UK companies.

Further reading

A billion reasons to value the Pension Protection Fund (PPF)

Blog
by Christopher Shortt   •  

Spence Quarterly Report Q3 2021

Blog
by Andrew Kerrin   •  

Illiquid assets – what do trustees need to know?

Blog
by Simon Cohen   •  

More Insights?