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Dividend tax: the new system

 

Dividend tax: the new system

It's been 18 months since George Osborne announced an overhaul of dividend taxation and we're still talking about it.

The changes, which came into effect at the start of the 2016/17 tax year, have fundamentally changed the way that dividends are taxed.  What are these changes, and how will they affect your tax bill?

The dividend tax-free allowance

From April 2016, all individuals (basic, higher and additional rate taxpayers) enjoy a £5,000 tax-free dividend allowance. You will pay no tax on the first £5,000 of income you receive from dividends each tax year. Dividend income that exceeds £5,000 will be taxed at the relevant band rate.

Dividend tax

The tax rate for each income band was increased as part of the C changes. Basic rate taxpayers will now face a 7.5% tax charge on all dividend income over £5,000 – a significant increase considering they previously paid no dividend tax at all.

The higher rate has increased to 32.5% while additional rate taxpayers now pay 38.1% in tax on their dividend income.

 

 

2016/17 tax rate

2015/16 effective tax rate

Basic rate

7.5%

0%

Higher rate

32.5%

25%

Additional rate

38.1%

30.56%

 

How can I minimise tax on dividends?

For those of you with smaller portfolios, holding shares in an ISA can protect yourself against a dividend tax charge. Shares in ISAs do not attract dividend tax and are also income and capital gains tax-free. In the 2017/18 tax year the ISA allowance will rise from the current £15,240 to £20,000.

Individuals with income exceeding the current ISA allowance require more complex tax strategies and should seek the help of a professional before proceeding.

Talk to us

Our experienced team of tax specialists can provide advice and assistance if you’re unsure how these changes will affect you.

Contact us on 01628 631 056 or email tracya@knightandcompany.co.uk for more information.