From April this year, the notional 10% tax credit on dividends is to be abolished and will be replaced by a new tax-free Dividend Allowance. This allowance means that you won’t have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.
Income tax will apply to any 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 new system will mean those with significant dividend income will pay more tax. If you are an investor with modest income from shares you’ll see either a tax cut or no change in the amount of tax you owe.
Dividends received by pensions funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA) will continue to remain tax efficient and sheltered from these changes.
From 6th April 2016, you have to apply the new headline rates on the amount of dividends you actually receive, where the income is over £5,000 (excluding any dividend income paid within an ISA)
If you are a company director who takes dividends instead of a salary, you should obtain professional financial advice to find out how you could be affected by the upcoming changes in the next tax year and what steps you can take to be as tax-efficient as possible. Taking dividends may still be a good option, but there are other tax planning opportunities to explore such as paying into a pension that might reduce the amount of tax you pay.