The new dividend tax allowance was introduced in April 2016.
This allowance replaced the dividend tax credit with an annual £5,000 tax-free allowance. Income Tax is payable at special rates on dividends received over this amount.
In his Budget speech in March 2017, the Chancellor announced plans to reduce the tax-free allowance to £2,000 from April 2018. This measure was included in the Finance Bill but was one of the measures removed from the residual Bill that was fast-tracked through Parliament to receive Royal Assent before the last Parliament was dissolved. It is likely that this measure will be re-introduced in a soon to be published Summer Finance Bill 2017, but this is yet to be confirmed.
The tax rate for dividends received in excess of the dividend tax allowance has not changed and will be taxed at the following rates based on where the dividend income sits within the various Income Tax bands. For 2017-18, the rates of tax applied are:
Planning notes: The dividend tax allowance does not reduce income for tax purposes. Where income from dividends is currently £5,000 or less this amount will still be added to taxable income. The relief is actually applied further down a taxpayer’s computation for the year. The first £5,000 of dividend income is effectively taxed at 0%. This increases a taxpayer’s total taxable income and could push taxpayers into the higher rate or additional rate bands.
For these reasons, it is well worth having your Income Tax position checked at each tax year end, and if you take significant dividends from your own business, it may be prudent to re-examine the methods used to see if there are more tax efficient options available, especially if the annual tax-free allowance does drop to £2,000 from April 2018.
Please contact Exceed for more information or if you need assistance.