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Understanding dividends
For higher and additional rate
taxpayers the dividend and the
dividend tax credit are added
together and this figure is taxed
according to an individual’s income
tax band at the following rates:
•
higher rate: 32.5%
•
additional rate: 37.5%.
These taxpayers can reclaim the
dividend tax credit from the tax
due.
Comparing dividend tax
systems
The government hasn’t confirmed the full
details so it is not possible to fully assess the
impact of the changes at present. How the
£5,000 dividend tax allowance will work
with the personal allowance and dividend
tax rates is still an important, yet unconfirmed,
detail.
The following examples assume that:
•
dividends within the £5,000
allowance will count towards basic
and higher rate tax bands
•
the personal allowance for 2016/17
is £11,000
•
the basic rate limit for 2016/17 is
£32,000
•
the higher rate threshold for 2016/17
is £43,000
•
the people in the examples do not
receive any other income or dividends.
Non and basic rate
taxpayers
Hayley, John and Susan all receive £20,000
in dividends a year but have different salaries.
2015/16
None of the individuals pay tax on their
dividends under the current rules.
From April 2016
All of the individuals in these examples will
pay tax on their dividends from the 2016/17
tax year. However the amount of tax they will
pay will differ.
Hayley
The first £3,000 of Hayley’s dividends fall
within her remaining personal allowance and
as a result are tax-free. The next £5,000 of
dividends come under the annual dividend
allowance and are also tax-free. This leaves
£12,000 of dividend income that will be
taxed at the basic rate of 7.5%.
John
The first £5,000 of John’s dividends fall under
the annual dividend allowance and are
tax-free. This leaves £15,000 of dividend
income that will be taxed at the basic rate of
7.5%.
Susan
Susan’s situation is a little more complicated. All
of her salary falls within the personal allowance
and basic rate income tax band. She has not
used £3,000 of the basic rate allowance.
However, when the dividends are taken into
consideration, they push Susan’s total earnings
above the higher rate threshold, exposing a
proportion of her dividends to the higher rate of
tax at 32.5%.
The £5,000 dividend allowance is split in the
following way:
•
£3,000 ‘uses up’ Susan’s remaining
basic rate allowance
•
£2,000 falls under the higher rate.
The remaining £15,000 of dividends are taxed
at 32.5%.
Higher rate taxpayers
Pritesh earns £50,000 and receives £20,000
in dividends a year.
2015/16
As a higher rate taxpayer, Pritesh currently pays
32.5% tax on all his dividends and can reclaim
the tax credit.
From April 2016
Pritesh will pay less tax on his dividends
compared to 2015/16.
Although Pritesh earns £10,000 more
than Susan a year, they both pay the same
rate of tax on their dividends.
Minimising dividend tax
Until the exact details of the changes are
made public, approach any strategies to
minimise dividend tax with caution and
seek professional advice before making
any decisions.
Once the rules have been finalised, we
will be in a much stronger position to
advise on how the changes will affect you.
Dividend income £20,000
Tax credit
£2,222
Taxable dividend
income
£22,222
Tax
£22,222 x 32.5%
= (£7,222)
Tax credit
£2,222
Dividend after tax £15,000
Income
£50,000
Dividend income £20,000
Remaining personal
allowance
£0
Dividend allowance (£5,000)
Taxable dividend
income
£15,000
Tax
£15,000 x 32.5%
= (£4,875)
Dividend after tax £15,125
Hayley
John
Susan
Income
£8,000
£20,000
£40,000
Dividend income
£20,000
£20,000
£20,000
Remaining personal
allowance
(£3,000)
£0
£0
Dividend allowance
(£5,000)
(£5,000)
(£5,000)
£3,000 x 7.5 %
£2,000 x 32.5%
Taxable dividend income £12,000
£15,000
£15,000
Tax
£12,000 x 7.5%
= (£900)
£15,000 x 7.5%
= (£1,125)
£15,000 x 32.5%
= (£4,875)
Dividend after tax
£19,100
£18,875
£15,125
Talk to us about tax planning strategies.