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For dividend distributions made on or after 6th April 2016, the Dividend Tax Credit will be replaced by a new Dividend Allowance.

Taking the form of a 0% tax rate on the first £5,000 of dividend income per tax year, UK residents will then only pay tax on dividends received over this allowance.  Should you surpass the £5,000 threshold, individuals can then expect the following tax rates:

  • 7.5% on dividend income within the basic rate band.
  • 32.5% on dividend income within the higher rate band.
  • 38.1% on dividend income within the additional rate band.

Savings and dividend income is subject to your highest band of income tax.   Where an individual has both savings and dividend income, the dividend income is treated as the top slice.  To see some examples of how this should work in practice see the Government’s ‘Dividend Allowance factsheet’.

As with current rules, any dividends received via shares held within an ISA will continue to be tax free.

In the past, we have moved a couple’s taxable investments into the name of the lowest tax payer.   With the new £5,000 allowance however, we can look to split the portfolio so that each spouse capitalises on the 0% tax concession.  Moving forward, this will be considered when undertaking each client’s annual review.

For those of us who have used dividends as a tax effective way of drawing money from our businesses, this is of course a significant tax hike!   After reviewing our calculator (which determines the best way of taking money from your business), the pendulum has swung very much towards a combination of pension and earned income for those who are in the right circumstances.   If you would like to discuss ways of taking money out of your business, do get in touch.



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