Changes to the taxation of Dividends from April 2016

The New Dividend Allowance

From April 2016 a new annual tax-free Dividend Allowance replaces the 10% Dividend Tax Credit.

The new allowance means that no tax is payable on the first £5,000 of total dividend income.  This includes dividends from your own limited company plus any received from any other source such as shares or investments.

It is available to everyone irrespective of the level of non-dividend income they receive.

The Dividend Allowance does not reduce your total income for tax purposes but simply means that you don’t have any tax to pay on the first £5,000 of dividend income you receive each tax year.

Changes to the headline dividend tax rates

From April 2016 any dividend received over £5,000 will be taxed as follows:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band

Note the10% tax credit no longer applies.  This means you no longer have to gross up the net dividend value you receive.  However, the full rates above are used against each tax band to calculate the tax payable.

Under these changes individuals with significant dividend income will pay more tax however, there are a number of planning methods that may to reduce the tax you pay.  You can explore which planning methods may be right for you with one of the Brookson Financial Services team.

Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA), will continue to be tax free.

Examples

Following are some examples using the 2017/18 tax rates as follows:

Tax Band

Amount

Salary Tax rate

Dividend Tax rate

Personal Allowance

 £11,500

Nil

Nil

Basic Rate Band

£0 to £33,500

20%

7.5%

Higher Rate Band

£33,500 to £150000

40%

32.5%

Additional Rate

£150001 and above

45%

38.1%

 

Example 1

“I receive a salary of £11,500 and dividend income of £12,000 from my company”

 Salary Calculation (always performed first)

 The whole £11,500 is within and exhausts the personal allowance with no tax due.

 Dividends Calculation

 There is no personal allowance left.

 The whole £12,000 dividend falls into the Basic Rate Tax band.  However, the Dividend Allowance means £5000 is not taxed.  The remaining £7000 is therefore taxed at 7.5%.

 Tax Payable

 Salary = Nil

 Dividends = £525

 Total = £525

 

 Example 2

“I receive a salary of £11,500 and receive dividends from my company of £40,000.”

 Salary Calculation (always performed first)

 The £11,500 is all within and exhausts the personal allowance with no tax due.

 Dividends Calculation

 There is no personal allowance left.

 £33,500 of the £40000 dividend is in the Basic Rate Tax band. However, the Dividend Allowance means the first £5000 is not taxed and the remaining £28,500 is taxed at 7.5%.  

 This leaves £6,500 (£40000 - £33,500) falling into the Higher Rate band and is taxed at 32.5%.

 

Example 3

“I have a received a salary of £11,500 from my company, £7,000 income from property, and receive dividends of £22,000.” 

 Salary and Property Income Calculation (always performed first)

 In this case both these incomes are added together and taxed in the same way.

 £11,500 uses the personal allowance with no tax due.  The remaining £7000 is within the Basic Rate band and subject to 20% tax.

 Dividends Calculation

 There is no Personal Allowance left and £7000 of the Basic Rate band has been used leaving £26,500.

 The whole £22,000 dividend falls into the available £26,500 Basic Rate Tax band.  However, the Dividend Allowance means £5000 is not taxed.  The remaining £17000 is therefore taxed at 7.5%.

 

Example 4

I receive a salary of £40,000 and also receive £9,000 in respect of my company dividends.

Salary Calculation (always performed first)

 £11,500 uses the personal allowance with no tax due.  The remaining £28,500 is within the Basic Rate band and subject to 20% tax.

 Dividends Calculation

 There is no Personal Allowance left and £28,500 of the Basic Rate band has been used leaving £5,000 still to be used.

 £5,000 dividend falls into the remaining £5,000 Basic Rate Tax band.  However, the Dividend Allowance means this £5,000 is not taxed.

 The remaining £4,000 dividend falls into the Higher Rate Tax band.  The remaining £4000 is therefore taxed at 32.5%.

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