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This publication is available at https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet
From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance.
The Dividend Allowance means that you won’t have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.
The allowance is available to anyone who has dividend income.
Headline rates of dividend tax are also changing.
You’ll pay tax on any dividends you receive 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
This simpler system will mean that only those with significant dividend income will pay more tax.
If you’re an investor with modest income from shares, you’ll see either a tax cut or no change in the amount of tax you owe.
Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA), will continue to be tax free.
From April 2016 you have to apply the new headline rates on the amount of dividends you actually receive, where the income is over £5,000 (excluding any dividend income paid within an ISA).
The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive.
Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.
The way the allowance will work in different situations is demonstrated in the examples below.
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
- Higher Rate Threshold - £43,000
2.1 Example 1
‘I receive less than £5,000 per year in dividends’
From April 2016 you won’t have to pay tax on your dividend income as it is within your new Dividend Allowance.
2.2 Example 2
‘I receive dividends of £600 from shares invested in an ISA’
As is the case now, no tax is due on dividend income within an ISA, whatever rate of tax you pay.
2.3 Example 3
‘I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA’
With a Personal Allowance of £11,000, £4,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5%) on £2,500.
2.4 Example 4
‘I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA’
You won’t need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5%.
2.5 Example 5
‘I have a non-dividend income of £18,000, and receive dividends of £22,000 outside of an ISA’
Of the £18,000 non-dividend income:
- £11,000 is covered by the Personal Allowance
- the remaining £7,000 to be taxed at Basic Rate
Of the £22,000 dividend income:
- the Dividend Allowance covers the first £5,000
- the remaining £17,000 of dividends to be taxed at the Basic Rate (7.5%)
2.6 Example 6
‘I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA’
The Personal Allowance should be allocated in the most beneficial way but dividend income is treated as the ‘top slice’ of income.
Of the £40,000 non-dividend income, £8,000 is covered by the Personal Allowance, leaving the balance of £32,000 to be taxed at basic rate, this uses up all of the basic rate band.
Of the £9,000 dividend income, £3,000 is covered by the balance of Personal Allowance, which leaves income of £6,000 in excess of the basic rate band. The dividend allowance covers £5,000 of this leaving £1,000 of dividends to be taxed at higher rate (32.5%).