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Dividend tax allowance – further details

Last month's Summer Budget announced the plans for the replacement of the current 10% tax credit on dividends with a new dividend tax allowance.

The Treasury has recently published a factsheet outlining how the new dividend tax allowance will operate in relation to the standard personal allowance and for individuals with differing levels and types of income.

From April 2016, a £5,000 tax free allowance will be introduced on dividend income, with dividends in excess of this level being charged at the following rates.

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

It has been announced that tax free dividend allowance is available to anyone who has dividend income and an individual will not have to pay tax on the first £5,000 of dividend income, no matter what level of non-dividend income they have. The new dividend allowance will not reduce the total income for tax purposes, it merely means that on the first £5,000 of dividend income no tax will be payable.

As an example;

An individual receives £40,000 of non-dividend taxable income and £10,000 of dividend income. From April 2016, the first £11,000 of non-dividend income would be covered by the personal allowance. This would leave £29,000 to be taxed at the basic rate of 20%.

The individual now has £3,000 left in their basic rate band before the higher rate threshold is crossed.

Of the £10,000 dividend income, £5,000 would fall into the 0% tax dividend allowance. However, as the dividend allowance does not reduce income for determining which bands the income falls into, of this tax allowance, £3,000 would be deemed to fall into the basic rate band with the remaining £2,000 deemed to fall into the higher rate.

The remaining £5,000 of dividend income would therefore fall into the higher tax rate band and be subject to tax at a rate of 32.5%.

The new dividend rules are intended to simplify the whole dividend tax credit system. For those individuals with low levels of dividend income, they will see either a reduction in tax paid or no change in the tax owed, in comparison to the current dividend tax credit system.

If you have any further questions relating to the new rules on the taxation of dividends then please just contact your local Perrys office.

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