The Finance Bill 2016 implemented the new rules for taxing share dividend income announced by Chancellor George Osbourne in his 2015 Budget, which came into effect from 6th April 2016. Whilst the dividends received by Pensions and I.S.A’s were unaffected, the 10% dividend tax credit was abolished; a new £5,000 tax-free allowance introduced and (according to an individual’s tax status) dividends above this would then be taxed at:
- 7.5% (Basic Rate)
- 32.5% (Higher Rate)
- 38.1% (Additional Rate)
Up to tax year 2015/16 and under the more generous former system, Basic Rate Taxpayers paid no tax on any dividend income with Higher and Additional Rate Taxpayers incurring then lower rates of 25% and 30.55% respectively.
These developments impact any U.K resident taking dividends and whilst modest investors may not see any change, many will pay at least an extra 7.5% with Basic Rate Taxpayers now required to complete a Self Assessment Tax Return, if in receipt of a sum above the £5,000 allowance. To help the HMRC compiled a Dividend Allowance Factsheet with basic examples (including those listed below), calculated using current limits, allowances and thresholds for Income tax:
- Personal Allowance £11,000
- Basic Rate Limit £32,000
- Higher Rate Threshold £43,000
1. You derive less than £5,000 of dividends per year
As the dividend income falls within the new allowance there is no tax to pay.
2. £600 of share dividends are received from being invested in an I.S.A
There continues to be no tax on dividend income within an I.S.A, whatever rate of tax (Basic, Higher or Additional) you pay.
3. Non-Dividend income is £6,500 with share dividends of £12,000 from outside an I.S.A
Taking the permitted £11,000 Personal Allowance, £4,500 of dividends are under that threshold. A further £5,000 is within the new dividend allowance, leaving a Basic Rate of 7.5% to pay the remaining £2,500.
4. Non-Dividend income is £40,000 and you receive dividends of £9,000 outside of an I.S.A
With £40,000 non-dividend income, £11,000 is covered by the Personal Allowance leaving £29,000 to be taxed at the Basic Rate. £3,000 can therefore still be earned within the basic rate limit before crossing the higher rate threshold. The Dividend Allowance covers this £3,000 first with the remaining £2,000 of that allowance for use within the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and not subject to tax, but the remaining £4,000 of dividends are taxed at the higher rate (32.5%).
Private investors (particularly higher rate taxpayers) need to understand available reliefs, thresholds and their interaction to manage overall due tax. This is particularly important for individuals whose earnings are through a company by payment of dividends, they should consider business costs and other potential reliefs when making any decision to change how they draw an income. We recommend they seek the advice of an accountant (such as Watermill Accounting) on how they and the business could be affected.