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Dividends tax changes

Monday, June 27, 2016

Dividends tax changes

In April 2016, the government implemented changes to the way dividends are taxed, in a bid to simplify and update the rules.

The changes also removed some of the tax benefits previously enjoyed by limited company directors, including contractors. Although the government claims that one million tax payers will be better off, this will very much depend on your earnings.

Our brief guide outlines the basic facts behind the changes.

So, what has changed?

In a nutshell, the government has scrapped the dividend tax credit system that saw basic-rate taxpayers earn dividend income completely tax-free. Higher and additional rate taxpayers had to pay out 25% and 30.56% on their dividend income respectively.

Instead, there will be an annual tax-free dividend allowance of £5000 for all taxpayers.

When do the new rules take effect? 

The old tax credit system was scrapped for dividends for declared on or after 6th April 2016.

How are dividends taxed now?

After the personal allowance has been taken into account (£11,000 from April 2016 if you are entitled to the entire amount), directors can receive £5000 in dividends with no tax liability.

So, if your salary + dividends equals £16,000 or less, you will pay no dividend tax. In other words, this is a zero rate tax band for dividends.

How much will I pay on dividend income over £5000 a year?

This will depend on your tax band. If you take more than £5000 per year in dividends, one of 3 new tax rates will apply.

  • 7.5% (within the basic rate tax band)
  • 32.5% (within the higher rate tax band)
  • 38.1% (within the additional rate tax band)

Dividends received on shares held within Individual Savings Accounts (ISAs) will still be tax-free.

How do I pay it?

You will have to disclose your dividend income each tax year by completing a self-assessment tax return. Take a look at our useful guide to self-assessment.

Further Information

When it comes to tax, CharterRED are the experts. If you would like to find out more about how the dividend changes will affect you, please get in touch.

 

 

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