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.
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.