Dividend nil-rate

Chalmers HB can help taxpayers with any queries you have regarding dividends – here is an overview of the new Dividend Allowance scheme...

From April 2016, the dividend tax credit was replaced by a new tax-free Dividend Allowance.

This means that a person does not have to pay tax on the first £5,000 of dividend income, regardless of the level of non-dividend income. Headline rates of dividend tax also changed, with tax charged on dividends received 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.

The Dividend Allowance does not reduce total income for tax purposes, and dividends within the allowance still count towards the appropriate basic or higher rate bands. They may therefore affect the rate of tax payable on dividends received in excess of the £5,000 allowance.

Example 1

This is a quite straightforward example, based on 2016-17 tax rates and allowances, showing the taxable amounts after allocating the relevant allowances to the two types of income.

  Non-Dividend Income
Dividend Income
  18,000 22,000

Dividend Allowance

- 5,000
Personal Allowance 11,000 -
Taxable at basic rate 7,000 (20%)

17,000 (7.5%)

Example 2

This example is more complicated, in that it splits the dividend allowance into two - £3,000 to use up the balance of the basic rate band and £2,000 to 'eat into' the higher rate band.

  Non-Dividend Income
Dividend Income
  40,000 9,000
Personal Allowance 11,000 -
Dividend Allowance to basic rate limit - 3,000
Dividend Allowance higher rate band - 2,000
Taxable at basic rate 29,000 (20%) -
Taxable at higher rate - 4,000 (32.5%)

Please note that the government has announced plans to reduce the Dividend Allowance to £2,000 from April 2018.

Chalmers HB can advise businesses on a range of tax issues relating to dividends. Please contact us for more information.

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