The previous Dividend Tax Credit system will be replaced by a new Dividend Allowance in April 2016.
This allowance is for anyone who has income from dividend payments and essentially means that you will not have to pay tax on the first £5,000 of your income from dividends; this applies regardless of your non-dividend income. You will need to report any dividends as normal on your Self Assessment tax return.
New Headline rates of dividend tax changes
A new, straightforward system for the headline rates of dividend tax will also be introduced at the same time. They aim to ensure that those investors who have a smaller dividend income will see either no change in their tax bill, or see a reduction. People who earn a larger income from their shares portfolio will pay more tax.
For dividends over the new £5,000 allowance amount, you will pay tax at these rates;
- Dividend income within additional rate band = 38.1%
- Dividend income within higher rate band = 32.5%
- Dividend income within basic rate band = 7.5%
Dividend Allowance Important facts;
- Dividend income from shares held in an ISA remain tax free
- Pension funds that currently receive tax free dividends will stay exempt.
- The new headline rates are applicable to the amount of dividends you get over the £5,000 allowance from April 2016.
- Your ‘total income’ amount for tax purposes will not be affected by the new Dividend Allowance. It will mean that you can earn £5,000 from dividend income tax free.
- Dividend payments still make up your total income which defines whether you are in the basic or higher rate band. This impacts on the rate of tax you will pay on the dividends you get which are over the £5,000 allowance.
Examples
The following speculative figures have been used to give context to these examples;
In April 2016 – Personal Allowance = £11,000
- Basic Rate Limit = £32,000
- Higher Rate Threshold = £43,000
£5,000 annual income from dividends
This is within the new Dividend Allowance, so there is no tax to pay.
£600 dividends earned from shares in an ISA
ISAs remain exempt from tax, so no bill!
£12,000 dividend income (not in ISA) + £6,500 non-dividend ISA
You pay tax on £2,500 at the basic rate because;
With the Personal Allowance at £11,000, £4,500 is under the taxable threshold + new Dividend Allowance of £5,000.
£6,000 dividend income (not in ISA) + £20,000 non-dividend income
£6,000 – £5,000 Dividend Allowance = £1,000 taxed at 7.5%
£23,000 dividend income (not in ISA) + £18,000 non-dividend income
Non-dividend
£18,000 – £11,000 Personal Allowance = £7,000 taxed at Basic Rate
Dividend
£23,000 – £5,000 Dividend Allowance = £18,000 taxed at 7.5% Basic Rate
£9,000 dividend income (not in ISA) + £40,000 non-dividend
Non-dividend
£40,000 – £11,000 Personal Allowance = £29,000 at Basic Rate
Only need to earn £3,000 more to be in Higher Rate Band
Dividend
£9,000 – £5,000 Dividend Personal Allowance = £4,000 taxed at 32.5 % higher rate.
