As you may have heard, from April 2016 the way people will be taxed on their dividends is changing. This affects both dividends from private companies and outside investments.
Currently dividends benefit from a 10% tax credit which is deducted from the tax liability. This means that for a basic rate tax payer (total income up to £43,000) dividends are effectively free of income tax. A higher rate tax payer pays tax on dividends at an effective rate of 25% and an additional rate tax payer pays tax on dividends at an effective rate of 30.6%.
From April 2016 the tax credit on dividends is being replaced with a Dividend Allowance. Under the Dividend Allowance the first £5,000 of dividend income is tax free. After this income tax will be calculated 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
If your dividend income is greater than £5,000 a year then there is likely to be an increase in the amount of income tax that you will need to pay.
Dividends received by tax exempt pension funds or those on shares held within an Individual Savings Account (ISA) will continue to be tax free.
If your dividend income is greater than £5000 a year then there is likely to be an increase in the amount of income tax that you will need to pay.
The amount due will depend on your personal circumstances, so please get in touch if you would like further information on how these changes will affect you.