Q: I receive dividends as part of my income. I would like to know how the new rules will affect the amount of tax that I am due to pay.
A: As of April 2016, the new dividend allowance will be replacing the current dividend tax credit. The dividend allowance will be £5,000 and will be available to anyone who has dividend income irrespective of the level of non-dividend income you have. The rates at which the dividends will be taxed will also be changing. For basic rate tax payers (individuals with income up to £32,000), dividends will be taxed at 7.5%, higher rate (income above £32,000 and below £150,000) will be at 32.5% and additional rate payers (any individual with income exceeding £150,000) will now be taxed at 38.1%.
The result of these proposed changes mean that individuals with only small amounts of income received from dividends are unlikely to be affected, however, those with a significant income from dividends will be likely to pay more tax. It is important to note that the rules regarding dividends received from Individual Savings Accounts (ISA) and pension funds that are exempt from tax have not changed, any income received from these sources will still be tax free.
When calculating the tax due, the dividends that fall within the allowance still count towards the basic or higher rate bands and will affect the rate of tax that you pay (in excess of the £5,000).
If an individual’s income is comprised solely of dividends they will effectively have £16,000 tax free. This will be made up of the £11,000 personal allowance (tax free allowance per individual for the tax year 2016/17) and the £5,000 dividend allowance.
If their non-dividend income is below the personal allowance the remainder of the allowance will also be tax free on the dividends. For example, if the non-dividend income received was £4,000 and the dividends received were £15,000, then the tax due would be as follows:
11,000 – 4,000 = 7,000 remaining personal allowance (to be used against dividend income)
Remaining Personal Allowance (7,000)
Dividend Allowance (5,000)
Taxable Dividend 3,000
Taxed at 7.5% 225
Of course, if the non-dividend income received uses up the personal allowance then the dividends will only receive the £5,000 allowance.
If the non-dividend income and dividend income spans across two rates of tax (basic/higher or higher/additional) then the dividend allowance will need to be split accordingly. For instance, if an individual has non-dividend income of £42,000 and dividend income of £9,000 the calculation is as follows:
Non-Dividend Income 42,000
Dividend income 9,000
Personal Allowance (11,000)
Taxable Income 40,000
Basic Rate Band income (up to £32,000)
31,000 @ 20% 6,200
*1,000 @ 0% -
Higher rate band (income higher than £32,000)
*4,000 @ 0% -
4,000 @ 32.5% 1,300
Total Tax Liability 7,500
The amounts marked with * are covered by the £5,000 dividend allowance. As you can see, the £5,000 dividend allowance is split across the dividends, starting with the lower rate. This means £1,000 will be attributable to the dividends that fall into the basic rate band and £4,000 will be against the higher rate band. The balance of £4,000 will be taxed at 32.5%.
If you need any assistance with these new complex dividend changes then you should speak with your accountant. At Taxwise we have specialists that can work with you and your accountant, please give Taxwise a call (or ask your accountant to give us a call) on 0844 892 2470 and speak to our tax team (option 1) or drop us an e-mail at email@example.com