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%)

Article from ACCA In Practice

 

Whitefield Tax - Isle of Wight Accountants - IR35 specialists
Privacy Overview

This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.

To review our full Privacy and Cookie Policy please click here