Dividend allowance and rate of tax on dividends.

At a glance

Tax Free Dividend allowance

Year

Amount

£

2018/19 2,000

2016/17 to 2017/18

5,000
Up to 2015/16  nil


Finance Act 2016 made major changes to dividend tax from 6 April 2016.  

Subscribers, for detailed workings and the interaction with other reliefs and allowances, see

Dividends: subscriber guide

Dividends: trusts (subscriber guide)

Dividend tax from 6 April 2016

  • The notional 10% tax credit on dividends is abolished.
  • A tax free dividend allowance is introduced.
  • Dividends above the dividend allowance are taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate)
  • Dividends received by pensions and ISAs are unaffected by the changes.
  • Dividend income is still treated as the top band of income.
  • Individuals who are basic rate payers who receive dividends of more than the dividend allowance and who have not been sent a notice to file a tax return should notify HMRC of chargeability and complete self assessment returns.

Overview and examples

How does this work?

If you have dividend income (dividends held outside of an ISA) of less than the dividend allowance you pay no tax on your dividends, even if you are a higher rate taxpayer. Your dividends are covered by the dividend allowance.

If your total income is less than the personal allowance, your income is covered by your personal allowance and your dividend allowance is effectively unused.

If your dividend income is received through shares in an ISA, as now, these remain tax-free and the dividend allowance will not affect this income.

Example 2019/20

  • Non-dividend income of £6,500 and dividend income of £12,000
  • You pay at least £300 more compared to the rules in 2015/16.
  Income PA BR band
Non-dividend income 6,500 6,500  
Dividend 12,000 6,000 6,000
Total 18,500 12,500 6,000
Less DA     (2,000)
 Taxed at 7.5%      4,000
 Tax due      £300

 

Example 2018/19

  • Non-dividend income of £6,500 and dividend income of £12,000
  Income PA BR band
Non-dividend income 6,500 6,500  
Dividend 12,000 5,350 6,650
Totals 18,500 11,850 6,650
Less DA     (2,000)
 Taxed at 7.5%      4,650
 Tax due      £348.75

 

Example 2017/18

  • Non-dividend income of £6,500 and dividend income of £12,000
  Income   PA BR band
Non-dividend income 6,500 6,500  
Dividend 12,000 5,000 7,000
Totals 18,500 11,500  7,000
Less DA     (5,000)
 Taxed at 7.5%      2,000
 Tax due      £150

 

Example 2016/17

  • Non-dividend income of £6,500 and dividend income of £12,000
  • You pay £187.50 more a year in tax than before the changes came in
  Income PA BR band
Non-dividend income 6,500 6,500  
Dividend 12,000 4,500 7,500
Totals 18,500 11,000 7,500
Less Dividend Allowance     (5,000)
 Taxed at 7.5%      2,500
 Tax due      £187.50

 

Further examples show the impact of the dividend allowance and the interaction of making different claims for allowances:

  • Non-dividend income of £18,000 and dividend income of £22,000
  • Non-dividend income of £42,000 and dividend income of £9,000
  • Non-dividend income of £45,000 and dividend income of £5,000
  • Salary of £45,000 and dividend income of £14,000
  • Salary of £147,000 and dividend income of £15,000
  • See Dividends (subscriber guide)

Dividend FAQs 

1. How is dividend income taxed when non-dividend income is in excess of the personal allowance? For:

a) Higher rate taxpayer

b) Upper rate taxpayer

2.  What is the impact on the loss of the personal allowance at £100,000?

3. What is the impact on the High Income Child Benefit Charge? 

4. How do dividends interact with the savings rate band and the saving allowance?

5. Have you Step by step examples?

see Dividends (subscriber guide)


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