From the 6th April 2016 the way in which dividends are to be taxed will change.
At the moment basic rate tax payers are not required to pay tax on dividends, however from 6 April the notional 10% tax credit on dividends will be abolished and replaced with a new tax-free Dividend Allowance.
How the new system will work
Under the new system, all taxpayers will have a new tax-free dividend allowance of £5,000 a year. This therefore means that you will not have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have. Any sums above £5,000 will depend on your income tax band and will be taxed as follows:
- 7.5%on dividend income within the basic rate band
- 32.5%on dividend income within the higher rate band.
- 38.1%of income within the additional rate band.
If your dividend income pushes you from one tax band into the next, you will then pay the higher dividend rate on that portion of income. No tax will be deducted at source, instead you must use self-assessment to pay any tax due.
If you are a company director and shareholder who takes a dividend instead of a salary, then you should be looking to obtain professional financial advice to understand how you may be affected by these changes and what steps can be taken.