With effect from the 6th April 2016, there is a new basis for the taxation of dividends.
What are the key points?
- There is a new tax-free annual dividend allowance of £5,000 per person
- The tax charge on dividends has increased by 7.5% and so the charge is now:
- 7.5% within the basic rate band
- 32.5% within the higher rate band
- 38.1% within the additional rate band
- The existing 10% tax credit has been removed
What does this mean for me?
The majority of people who are in receipt of dividends will see an increase in their tax liabilities. If you take a common situation whereby a company owner receives a salary of £8,000 and gross dividends of £34,000, previously, this would not have created a personal tax liability. From 16/17 onwards, the same level of income would now create a tax liability of approximately £1,950.
Prior to 6 April 2016, the tax on dividends in the basic rate band would have been covered by the 10% tax credit attaching to the dividend. Now, those same dividends (after deducting the £5,000 dividend allowance and any remaining personal allowance) are taxed at 7.5%.
The new dividend tax charges may also trigger the payment on account rules whereby if your tax liability for the year is over £1,000 you are required to make payments on account of the following year’s tax liability as well.