This article summarises the changes to the way in which dividends are taxed since 6 April 2016. 

At a glance

What's New?

From 6 April 2018 the tax free dividend allowance reduce to £2,000 (previously £5,000). 

Finance Act 2016 changes

Finance Act 2016 included legislation for major changes to dividend tax from 6 April 2016.  

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. £5,000 for 2016/17 and 2017/18 and £2,000 from 2018/19 on.
  • Dividends above the div are taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate)
  • Dividends received by pensions and ISAs are unaffected
  • Dividend income are 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 from 6 April 2016.

Overview and examples

How does this work?

If you have dividend income (dividends held outside of an ISA) of less than the dividend allowance (£2,000 for 2018/19 and £5,000 for 2016/17 and 2017/18 you will 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 2018/19

  • Non-dividend income of £6,500 and dividend income of £12,000
  • Nearly £200 more tax to pay compared to 2017/18
  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


Further example 

  • Non-dividend income of £20,000 and dividend income of £6,000
  • You now pay £75 more a year in tax
  Income PA BR band
Non-dividend income 20,000 11,850 8,150
Dividend 6,000 - 6,000
Totals 26,000 11,850 14,150
Tax on dividend      
Dividend in basic rate band     6,000 
Less DA     (2,000)
 Taxed at 7.5%     4,000
 Tax due      £300

 

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 (£2,000 (£5,000 to 5 April 2018)) 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 for tax years: 2016/17, 2017/18 and 2018/19

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

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? 

Step by step guidance, see Dividends (subscriber guide)


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