Dividend tax rules from April 2016
For many years, dividends have traditionally been accompanied by a notional tax credit, which has meant that there has been no additional personal tax liability for basic rate taxpayers to pay on dividends received within the basic rate tax band.
However, from 6 April 2016, the previous system has been abolished and a new £5,000 effective tax-free dividend allowance has been introduced.
This means that an individual can earn up to £5,000 of dividends income tax free, but anything over the £5,000 threshold will be liable for tax even within the basic rate band. The basic rate band is £32000 in this tax year to 5 April 2017.
The initial £5000 of dividend income does form part of an individual’s taxable income when determining the income tax bands but is subject to a tax rate of 0%.
The tax rates for dividends above the £5,000 allowance are at 7.5% (up from 0%) for basic rate taxpayers, 32.5% (up from 25%) for higher rate taxpayers and 38.1% (up from 30.56%) for additional rate taxpayers.
These changes to dividend taxation will impact on the overall tax liability for owner-managed businesses.
From 6 April 2016, the UK personal allowance (the amount that can be earned before tax is applied) has been set at £11,000.
Therefore if someone is entitled to the full £11,000 personal allowance, but also earns £5,000 of dividend income on top of that allowance, they can earn £16,000 with no income tax liability in 2016/17.
At The Fish Partnership, we can advise clients on how to structure their tax affairs in the most tax effective way to maximise their income and reduce their tax liability. To find out how our experts at The Fish Partnership can help you, please contact us.