Dividend Allowance Factsheet
From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance.
The Dividend Allowance means that you won’t have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.
The allowance is available to anyone who has dividend income.
Headline rates of dividend tax are also changing.
You’ll pay tax on any dividends you receive over £5,000 at the following rates:
- 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
This will mean that a limited company business owner who withdraws more than £5,000 per annum in dividends will see an increase in their personal tax liability from April 2016 onwards.
Any increase in personal tax will become payable on 31st January 2018.
If you think that this applies to you then please contact us and we will provide you will a calculation of the expected increase in tax.
If you are an investor with modest income from shares, you’ll see either a tax cut or no change in the amount of tax you owe.
From April 2016 you have to apply the new headline rates on the amount of dividends you actually receive, where the income is over £5,000 (excluding any dividend income paid within an ISA).
We provide some examples of how the changes may effect you below:
(Where appropriate to the calculations, the examples use the limits that will apply from April 2016)-
- Personal Allowance: £11,000
- Basic Rate Limit: £32,000
- Higher Rate Threshold: £43,000
“I receive less than £5,000 per year in dividends”
From April 2016 you won’t have to pay tax on your dividend income as it is within your new Dividend Allowance.
“I receive dividends of £600 from shares invested in an ISA”
As is the case now, no tax is due on dividend income within an ISA, whatever rate of tax you pay.
“I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA”
With a Personal Allowance of £11,000, £7,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5%) on £2,500.
“I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA”
You won’t need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5%.
“I have a non-dividend income of £18,000, and receive dividends of £22,000 outside of an ISA”
Of the £18,000 non-dividend income:
- £11,000 is covered by the Personal Allowance
- the remaining £7,000 to be taxed at Basic Rate
Of the £22,000 dividend income:
- the Dividend Allowance covers the first £5,000
- the remaining £17,000 of dividends to be taxed at the Basic Rate (7.5%)
“I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA”
Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate.
This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax.
The remaining £4,000 of dividends are all taxed at higher rate (32.5%).