In his Spring Budget 2017 the chancellor announced that from 6 April 2018 the tax free dividend allowance would reduce to £2,000 (previously this was £5,000 from 6 April 2016).
Finance Act 2016 made major changes to dividend tax.
- This guide sets out the way in which the dividend allowance is calculated for basic and higher rate taxpayers and how it interacts with other income, allowances and the savings allowance.
- The rules were also amended for UK dividends when received by non-residents, and the tax credit removed on other types of distribution, e.g. on the release of a loan by a close company.
From 6 April 2016
- The notional 10% tax credit on dividends was abolished.
- There is no longer a requirement to gross up dividends.
- A £5,000 tax free dividend allowance was introduced (reducing to £2,000 from April 2018)
- Dividends above this level are taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate).
- There is no longer an "effective" dividend tax rate, due to the lack of the tax credit.
- Dividend income is treated as the top band of income.
- This measure applies to dividends received by a UK taxpayer from either UK and offshore companies
- Dividends received by pensions and ISAs are unaffected
- Individuals who are basic rate payers who receive dividends between £5,001 and £10,000 have to complete self assessment returns from 6 April 2016.
Certain payments that are treated as income distributions are no longer as treated as tax paid. This applies to:
- Non-qualifying distributions and stock dividends from UK or offshore companies.
- Loans to participators that are released or written off.
- Tax credits on certain distributions received by companies (or that are treated as the income of a company).
Non-residents who receive dividends from UK companies are treated as though they have paid tax on their dividend at the dividend ordinary rate of 7.5%
Relief is also given to recipients of certain qualifying distributions that are linked to company distributions of redeemable share capital and securities (CD distributions, in s1000(1) TCA 2010.
Impact of Finance Act 2016 changes
- The changes affected anyone in receipt of dividends, although the first £5,000 of any dividend is tax free,
- Upper rate taxpayers pay tax at 38.1% instead of an effective rate of 30.55% in 2015/16
- Higher rate taxpayers pay tax at 32.5% instead of an effective rate of 25% in 2015/16
- Basic rate taxpayers pay tax at 7.5% instead of 0% in 2015/16
- Some 8,500 taxpayers were brought into self assessment.
- This measure had harsh effect on those who work with spouses in very small family companies. For example, a couple spitting profits of £100,000 per year may be over £5,000 p.a. worse off under the new measures.
- Non-residents in receipt of dividends are unaffected.
The dividend allowance remains at £5,000, and tax rates are the same as in 2016/17.
The personal allowance and basic rate threshold have however increased to:
- Personal allowance (PA): £11,500
- Basic rate (BR) threshold: £33,500
Examples 1 and 2
If you have dividend income (dividends held outside of an ISA) of £5,000 or less per year you will pay no tax on your dividends, even if you are a higher rate taxpayer. Your dividends are covered by the £5,000 dividend allowance.
If your total income is less than £11,500 your income is covered by your personal allowance and your dividend allowance is effectively unused.
If your dividend income is received through shares in an ISA, as now, these remain tax-free and the dividend allowance will not affect this income.
Example 3: basic rate taxpayer
- Non-dividend income of £6,500 and dividend income of £12,000
|Taxed at 7.5%||2,000|
- Non-dividend income of £18,000 and dividend income of £22,000
|Dividend in basic rate band||22,000|
|Dividend taxed at 7.5%||17,000|
|Tax due on dividend||£1,275|
- Non-dividend income of £42,000 and dividend income of £9,000
|Income||PA||BR band||HR band|
|Dividend in BR/HR band||3,000||6,000|
|Dividend taxed at 32.5%||0||4,000|
|Tax due on dividend||-||1,300|
- Non-dividend income of £45,000 and dividend income of £5,000
|Income||PA||BR band||HR band|
|Dividend in BR/HR band||-||5,000|
|Dividend taxed at 32.5%||-||0|
|Tax due on dividend||-||0|
- Salary of £45,000 and dividend income of £14,000
|£11,500 covered by personal allowance||-|
|£31,500 taxed at basic rate 20%||6,300|
|Balance of basic rate band remaining £2,000|
|£2,000 falls within basic rate band and is covered by the dividend allowance||-|
|£3,000 falls within the higher rate band and is covered by the dividend allowance||-|
|£9,000 falls within the higher rate band and is taxed at 32.5%||2,925|
|Total tax payable||£9,225|
Example 8: Upper rate taxpayer
- Salary of £147,000 and dividend income of £15,000
|£0 covered by personal allowance (lost due to income level)||-|
|£33,500 taxed at basic rate 20%||6,700|
|£113,500 taxed at higher rate 40%||45,400|
|Balance of higher rate band remaining £3,000|
|£3,000 falls within higher rate band and is covered by the dividend allowance||-|
|£2,000 falls within the upper rate band and is covered by the dividend allowance||-|
|£10,000 falls within the upper rate band and is taxed at 38.1%||3,810|
|Total tax payable||£55,910|