Dividends – New Rulings 2016/17

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.

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

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.

Example:

“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%)