Dividend taxation changes

04 Jan Dividend taxation changes

As part of the Summer Budget measures, the government announced the introduction of a new dividend allowance from April 2016. The new allowance will replace the current non-refundable dividend tax credit of 10%. The draft legislation to enact these changes was published last month.

The new dividend allowance means that no tax will be due on the first £5,000 of dividend income received regardless of the amount of non-dividend income.

However, dividends in excess of the £5,000 allowance will be taxed at the following new rates based on the recipient’s highest rate of Income Tax:

  • 7.5% for basic rate tax payers
  • 32.5% for higher rate tax payers, and
  • 38.1% for additional rate tax payers.

Dividends received within the £5,000 allowance will still count towards the basic or higher rate bands, and may therefore affect the rate of tax paid on dividends received in excess of the £5,000 allowance. Dividends received by pension funds and dividends received on shares held in an ISA, will continue to be tax free.

The changes will benefit those with a small amount of dividends. However those with a significant amount of dividends will in most cases pay more tax under the new regime.

HMRC figures suggest that around 2 million individuals are expected to have some tax to pay on their dividend income after April 2016, compared to 1.8 million if these reforms had not been put in place.

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