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Tax free dividend allowance from April 2016

  • From April 2016 there are changes to the way dividends are taxed.
  • The dividend allowance means you will not pay tax on the first £5,000 of dividend income, no matter what non-dividend income you have.
  • Dividends received from Pension funds and ISA continue to be tax free.

Currently the effective dividend tax rate (taking into account notional tax credit) is:

  • Basic rate band 0%
  • Higher rate tax band 25%
  • Additional rate band 30.6%

From 6.4.16 you will pay tax on any dividends over £5,000 at the following rates:

  • Basic rate band 7.5%
  • Higher rate tax band 32.5%
  • Additional rate band 38.1%

Using HMRC examples this means:

  • If you receive less than £5,000 per year in dividends – from 6.4.16 you will not pay tax on dividend income as it is within your dividend allowance
  • If you receive dividends of £600 from shares invested in ISA – after 6.4.16 you will not pay tax on dividend income within an ISA, as is the case now
  • If you have non dividend income of £6,500 and dividend income of £12,000 from shares outside of ISA – from 6.4.16 you will pay tax on £2,500 at 7.5% – non dividend income is covered by personal allowance of £11,000 which leaves £4,500 and £5,000 dividend allowance to set against dividend income
  • If you have non dividend income of £20,000 and receive dividends of £6,000 outside ISA – from 6.4.16 you will pay tax on £1,000 at 7.5% due to dividend allowance
  • If you have non dividend income of £18,000 and receive dividends of £22,000 outside ISA – from 6.4.16 of the non-dividend income £11,000 is covered by personal allowance and the remaining £7,000 is taxed at basic rate – of the £22,000 dividend income, dividend allowance of £5,000 is set against the dividend income and the remaining £17,000 is taxed at 7.5%
  • If you have non dividend income of £40,000 and receive dividends of £9,000 outside of ISA – from 6.4.16 of the non-dividend income £29,000 is taxed at basic rate (£40,000 less personal allowance of £11,000). This leaves £3,000 that can be earned within the basic rate limit (£43,000 band at basic rate less £40,000 non dividend income), and this is covered by the dividend allowance, and leaves £2,000 of the allowance at the higher rate of 32.5%. The remaining £4,000 of dividends is all taxed at 32.5%.

If you would like to read more on this please click on the below links

.gov.uk Dividend Allowance factsheet
Rawlinsons Blog | The Summer Budget 8th July 2015