One of the announcements made in the Summer Budget in July was a major change in the taxation of dividends, which will take effect from April 2016. The legislation itself will be finalised later this autumn and we will include a full article on the changes in the next PIN. However, we include below a summary of the proposed changes:
From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance.
The Dividend Allowance means that the first £5,000 of your dividend income is tax free, no matter what non-dividend income you have.
The main rates of taxation on dividends are also changing, as follows:
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
From April 2016 the notional 10% tax credit on dividends will be abolished and you will have to apply the new headline rates on the amount of dividends you actually receive, where the income is over £5,000 (excluding any dividend income paid within an ISA).
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.