If you receive dividends there are changes coming into effect next year you need to know about now. Here is a summary of what these are, and advice on planning so you minimise any income tax due.
How Much Will The April 2016 Dividend Tax Changes Cost You?
From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance. The Dividend Allowance means that individuals will not have to pay tax on the first £5,000 of their dividend income, no matter what level of non-dividend income individuals receive, with the allowance being available to anyone who receives a dividend income.
Rates of dividend tax are also changing. Individuals will pay tax on any dividends they receive over £5,000 at the following rates:
- 50% on dividend income within the basic rate band
- 50% on dividend income within the higher rate band
- 10% on dividend income within the additional rate band
HMRC considers that only those with significant dividend income will pay more tax. The new system will be advantageous to some, but there are others for whom this will have a negative impact, such as basic rate tax payers with dividend income over £5,000. Currently these individuals would pay no tax until they cross the higher rate threshold, but from next tax year they will pay 7.50% tax on dividend income received over £5,000. From the viewpoint of an investor whose marginal rate of tax is above basic rate, the £5,000 dividend allowance appears quite generous:
- For a higher rate taxpayer, the allowance represents a saving of up to £1,250 (£5,000 @