Dividend nil-rate

Certax can help taxpayers with any queries you have regarding dividends – here is an overview of the new Dividend Allowance scheme…

From April 2016, the dividend tax credit was replaced by a new tax-free Dividend Allowance.

This means that a person will not have to pay tax on the first £5,000 of dividend income, regardless of the level of non-dividend income. Headline rates of dividend tax also changed, with tax charged on dividends received 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.

Investors with modest income from shares will see either a tax cut or no change in the amount of tax owing.

The Dividend Allowance will not reduce total income for tax purposes, and dividends within the allowance will still count towards the appropriate basic or higher rate bands. They may therefore affect the rate of tax payable on dividends received in excess of the £5,000 allowance.

The dividend allowance is to be reduced to £2,000 from 6 April 2018.

Example 1

This is a quite straightforward example, showing the taxable amounts after allocating the relevant allowances to the two types of income.

 Non-Dividend Income
£
Dividend Income
£
 18,00022,000

Dividend Allowance

5,000
Personal Allowance11,000
Taxable at basic rate7,000 (20%)17,000 (7.5%)

Example 2

This example is more complicated, in that it splits the dividend allowance into two – £3,000 to use up the balance of the basic rate band and £2,000 to ‘eat into’ the higher rate band.

 Non-Dividend Income
£
Dividend Income
£
 40,0009,000
Personal Allowance11,000
Dividend Allowance to basic rate limit3,000
Dividend Allowance higher rate band2,000
Taxable at basic rate29,000 (20%)
Taxable at higher rate4,000 (32.5%)

Certax can advise businesses on a range of tax issues relating to dividends. Please contact us for more information.