A new Dividend Allowance replaced the Dividend Tax Credit in April 2016, and is available to anyone who has dividend income. This means that you wont have to pay tax on the first £5,000 of Dividend Income, regardless of any other types of Income you may have.

Tax on Dividends has been simplified, so any dividend income you receive over £5,000 will be taxed 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 they owe. The simpler system will see those with significant dividend income paying more tax, however pension funds & ISAs will continue to receive tax free dividend income.

Whilst the Dividend Allowance won’t reduce your total income for tax purposes, it will mean that you don’t have to pay tax on the first £5,000 of dividend income you receive. However dividends within your allowance will still count towards your basic or higher rate bands, and may affect the rate of tax you pay on dividends you receive in excess of the £5,000 allowance.

Let’s take a look at some examples of how the Dividend Allowance will work;

Example 1
“I have non-dividend income of £8,000 plus a dividend income of £10,500 from shares outside of an ISA.” – With a 2016/17 personal allowance of £11,000, the first £3,000 of dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, which leaves tax to pay at basic rate (7.5%) on £2,500.

Example 2
“I have non-dividend income of £22,000 (£11,000 is covered by the personal allowance, and £11,000 is taxed at Basic Rate) plus a dividend income of £8,000 from shares outside of an ISA.” – As a basic rate tax payer, the first £5,000 of dividends are tax free due to the Dividend Allowance, and tax will be payable on £3,000 of dividends at 7.5%.

Example 3
“I have non-dividend income of £15,000 (£11,000 is covered by the personal allowance, and £4,000 is taxed at Basic Rate), plus a dividend income of £20,000 from shares outside of an ISA.” – As a basic rate tax payer, the first £5,000 of dividends are tax free due to the Dividend Allowance, and tax will be payable on £15,000 of dividends at 7.5%.

Example 4
“I have non-dividend income of £45,000 (£11,000 is covered by the personal allowance, £21,000 is taxed at Basic Rate, and £13,000 is taxed a Higher Rate), plus a dividend income of £9,000 from shares outside of an ISA.” – As a higher rate tax payer, the first £5,000 of dividends are tax free due to the Dividend Allowance, and tax will be payable on £4,000 of dividends at 32.5%.

 

If you need help tax planning please use the CONTACT US facility on this website and we will be very pleased to help.

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