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Dividends Allowance Guide

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 Allowance Important facts;

Examples

The following speculative figures have been used to give context to these examples;

In April 2016 – Personal Allowance = £11,000

£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.

 

Tony Shanks

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