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