Tax-free Dividend Allowance: What you need to know

Summary of changes

Together with the new allowance, the headline rates of dividend tax will also change. The updated rates will see only those with significant dividend income paying more tax. This will be a boost for the majority of small investors. Owner-managers who remunerate themselves by paying dividends instead of taking a salary, using the low salary/high dividend profit extraction model, will have a cause for concern.

The new dividend taxation rules will increase the taxes paid by most owner-managers. However, it is still likely to be cheaper in tax terms - for both the company and individual - to declare a dividend in 2016/17 than pay a bonus subject to PAYE.

Any dividend received over £5,000 will be subject to 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

Investors with modest income from shares can expect either a tax cut or no change in the amount of tax due. Dividends received from shares held in an Individual Savings Account (ISA) as well as those received by pension funds, will continue to be tax free.   
The allowance will not reduce your total income for tax purposes, but it will mean that you won’t have to pay tax on the first £5,000 of dividend income you receive.

Dividends within your allowance will still count towards your basic or higher rate bands. Therefore they may affect the rate of tax paid on dividends received in excess of the £5,000 allowance.

The following limits will apply from April 2016:

• Personal Allowance: £11,000
• Basic rate limit: £32,000
• Higher rate threshold: £43,000

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