After over a month of confusion following the Summer Budget as to how the government's new proposals for dividend taxation from 2016/17 will work, HMRC has now published a Dividend Allowance Factsheet with more detail and illustrative examples.

A few days earlier, HMRC provided the Institute of Chartered Accountants (ICAEW) with details which they publicised via a webinar. 

There will not be a new extra £5,000 basic rate band for dividends as the ICAEW had thought.  Instead dividend income will continue to be the top-slice of income, with the £5,000 dividend allowance falling within the relevant tax band.  In other words, no tax will be payable on the first £5,000 of dividend income, regardless of the amount of dividend and non-dividend income received.

The allowance is therefore more beneficial to higher earners, saving a maximum of £375 at basic rates (£5,000 @ 7.5%), a maximum of £1,625 at higher rates (£5,000 @ 32.5%) and a maximum of £1,905 at the upper tax rates (£5,000 @ 38.1%). Small company owners are biggest losers under the proposed changes.

See Dividends: new tax proposals for example calculations for taxpayers and small company owners and workings.

 

 

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