The taxation of dividends from April 2016

The taxation of dividends is changing from April 2016. A new tax-free dividend allowance will be introduced along with additional taxation rates.

The tax-free dividend allowance will mean that the first £5,000 of dividend income received by an individual will be tax free and it will be available to anyone including individuals taxed at higher or additional rates of tax.

The rates on which dividends are to be taxed are as follows:

1) Dividend income above the allowance                                                   7.5%
but still within the basic rate band

2) Dividend income in the higher rate band                                            32.5%

3) Dividend income in the additional rate band                                      38.1%

Meaning those that have dividend income above the tax free allowance are likely to feel the crunch.

Example
Tax Year                                                                    15/16                      16/17
 .                                                                                      £                              £

Annual Salary                                                          10,000                     10,000
Dividend Income                                                    30,000                     30,000
Total                                                                         40,000                     40,000

Personal tax due
On Salary                                                                          0                                0
On Dividend income                                                        0                        1,800

Individuals, especially small company directors, should seek tax planning advice on extraction of income from their companies.

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