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Tax-free Dividend Allowance: What you need to know

by Gareth Edwards | Nov 03, 2015
  • In April 2016, the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance. This will be available to anyone who has dividend income. The Dividend Allowance classifies the first £5,000 of your dividend income as non-taxable.
    dividends allowances

    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

    Get personal advice on how the new Dividend Allowance will affect you. Email us or call our accounting team on +44 (0) 20 7759 7553.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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