Dividend tax and allowance

From 6 April 2016 the taxation of all dividends received by individuals will change significantly – pension funds, ISAs and companies will not be affected. There are still outstanding questions about the taxation of dividends received by trusts and non-resident individuals.

 

There are three key facts to understand about the new dividend tax regime:

1. The cash amount of dividend received will be the amount subject to tax – there will be no grossing up for tax purposes.
2. The first £5,000 of dividend income per year will be taxed at 0% – whatever income tax band it falls into.
3. Dividends received in excess of £5,000 will be taxed at 7.5%, 32.5% or 38.1%, depending on whether they fall into the basic, higher, or additional rate income tax band.

The HMRC factsheet on the dividend allowance explains how this “allowance” will apply. It won’t work like the personal allowance, which was the impression given by the Summer Budget announcement, it will be a zero tax rate.

Dividend income will be taxed as the highest slice of income (as now), so it will fall within the highest tax band for the taxpayer. However, within that tax band the first £5,000 of dividends will be subject to tax at 0% rather than at the rate applicable to dividends.

Example

In 2016/17 Harry takes dividends of £60,000 from his own company, but no salary. The personal allowance is £11,000 and basic rate band: £32,000.

  Income   Tax payable
Dividend received £60,000   £
Personal allowance (11,000)    
  49,000    
Basic rate band : (32,000)    
Dividend ”allowance”   5,000 @0% 0
Residue of basic rate band   27,000 @7.5% 2,025
Higher rate band: 17,000 17,000 @32.5% 5,525
Total tax payable:     7,550

 
It is possible that the dividend “allowance” – or zero rate for dividends – to give it a more accurate name, will fall into two income tax bands, as is illustrated in example 6 in the HMRC factsheet.

The total amount of dividend income received will count as part of the taxpayer’s net adjusted income when calculating whether the £100,000 threshold for withdrawing the personal allowance is breached. Also parents need to count all their dividend income to test whether the £50,000 threshold for the high income child benefit charge is breached. Although the dividend income included in those calculations is the amount received, not a grossed-up amount.

The ICAEW Tax Faculty has published a free webinar and slides which explain the issues in greater detail. These materials can be accessed by everyone, they are not restricted to Tax Faculty members.

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