Taxation of dividends
There are three changes to the way the dividends you receive will be taxed from 6 April 2016:
- The cash amount of dividend income received will be the amount subject to tax and the 10% tax credit will not apply
- The first £5,000 of dividend income per year will be taxed at 0% – so-called 'dividend allowance'
- Dividends received in excess of £5,000 will be taxed at special rates for dividends depending on which tax band they fall into, but there won't be a tax credit to off-set the tax due
Dividend income will be taxed as the highest slice of your income, as it is now. So if your highest tax rate is 20% your dividends will be taxed at 7.5%; for 40% taxpayers dividends will be taxed at 32.5%, and for those with an income above £150,000 dividends will be taxed at 38.1%.
However, within the first tax band the dividend income falls into, the first £5,000 of dividends will be subject to tax at 0% rather than at the rate applicable to dividends.
If you receive the majority of your income in the form of dividends from your own company, you will almost certainly pay more tax for 2016/17 than for 2015/16.
Say you take £60,000 from your company as dividends, with no salary and you have no other income:
- For 2015/16, with a personal allowance of £10,600 and basic rate band of £31,785, your tax liability will be £5,463
- For 2016/17, with a personal allowance of £11,000 and basic rate band of £32,000 (figures already announced), your tax liability will be £7,550 – a tax increase of £2,087
Everyone will be affected differently according to the mix of dividends and other income received. Let's talk about how your tax position will be affected in 2016/17. The dividends received by your pension fund, ISA, or your company won't be affected.