Many director/shareholders of family companies pay themselves a small salary and take the rest of their “pay” in dividends. With dividends being free of NIC, this would have allowed them to avoid the extra 1.25% NIC charge when it was originally introduced.
Consequently, the Government added 1.25% to the dividend income tax rates for 2022/23.
Although the NIC increase is being abolished from 6 November 2022, the additional 1.25% will continue to be applied to dividends paid throughout 2022/23.
From 2023/24 the dividend income tax rate will however revert to 7.5% where dividends fall within an individual’s basic rate band and 32.5% for higher rate taxpayers. Note that the first £2,000 of dividends continue to be taxed at 0%.