Tax free allowance of £5000 to be introduced next month.
April 2016 sees the (non-reclaimable) 10% tax credit that has been carried with dividends since April 1999 scrapped and replaced with a new tax-free dividend allowance. The allowance of £5,000 is available to anyone who has dividend income.
Tax is payable on dividends 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
Things to remember:
dividend income paid within an ISA remains tax free and does not form part of the £5,000 allowance
dividends may be partially taxed at 0% but will still be included in the total taxable income, and so may affect the tax rates for dividends received in excess of £5,000 and other non-dividend income.
Examples of how the new dividend tax will work 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
Example 1 Dividend income less than £5,000 There will be no tax on the dividend income as it is within the new dividend allowance.
Example 2 General taxable income of £20,000 and dividend income of £6,000 Dividend income of £1,000 (£6,000–£5,000) will be at 7.5% (basic rate band)
Example 3 General taxable income of £40,000 and dividend income of £9,000 General income £40,000 Less personal allowance £11,000 Leaving amounts taxable at basic rate £29,000
This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed (£32,000– £29,000).
The dividend allowance is then used: Dividend income: £9,000 Less dividend tax allowance: £5,000 Leaving: £4,000 of dividend income to be taxed at higher rate (32.5%)