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A basic guide to dividend tax planning

A basic guide to dividend tax planning

Dividends, as with other types of investment income, are taxable by the government. This system of dividend taxation was overhauled by the previous government in 2015. Investors now receive a tax-free allowance instead of the old dividend tax credit, and dividends are taxed at different rates.

This blog post will provide an introduction to the rules of dividend taxation and briefly explain how ISAs may be used in order to lower your dividend tax bill.

Tax on dividends: the basics

All investors receive the first £5,000 in dividend income tax-free. Any income exceeding this £5,000 allowance will be charged tax at a rate determined by your income tax band.

Tax rate on dividends above £5,000

Marginal rate

Tax rate

Basic rate

7.5%

Higher rate

32.5%

Additional rate

38.1%

Dividend tax allowance changes shelved

Chancellor Philip Hammond announced during Budget 2017 that the tax-free allowance would fall from £5,000 to £2,000 from April 2018. However, the government did a U-turn on the proposal and confirmed the measure had been removed from legislation before the publication of the Finance Bill 2017.

Lowering dividend tax using ISAs

Placing some of your stocks and shares into a tax-free ISA is possibly the simplest way of lowering your exposure to dividend tax. The ISA allowance for the 2017/18 tax year is £20,000, allowing you to potentially place £20,000 worth of stocks and shares into an ISA. Any dividends you receive from these shares will be exempt from a dividend tax charge.

Get in touch

Our tax advisers are here to ensure you pay as little dividend tax as possible.

Contact us on 01628 631 056 or email tracya@knightandcompany.co.uk for more information about our personal tax planning services.