The Dividend Allowance

Category: Financial planning

The new dividend allowance will mean that from 2016/17 the first £5,000 of dividends you receive will be free of any personal income tax liability, regardless of your marginal tax rate. However, once the allowance is exceeded the effective tax rates are generally 7.5% higher than currently apply, as the table below shows.

Extra Tax Due on Dividends 

Tax Rate 2015/16 2016/17
All dividends    % Within             allowance % Above     allowance %
Basic 0 0 7.5
Higher 25 0 32.5
Additional 30.56 0 38.1

If you use dividends as a way of drawing remuneration from a private company, then you could be worse off from 2016/17 because the extra tax you pay above the allowance will more than nullify the savings on dividends within the allowance. In such circumstances, you might want to consider bringing forward a dividend from next tax year to 2015/16. Some listed companies are likely to do the same to save their shareholders money, as happened ahead of the introduction of the 50% tax rate.

Note: For 2015/16 the extra tax calculation allows for the 10% non-repayable tax credit that accompanies a dividend payment. This credit (and the related process of grossing up dividends) will disappear from 2016/17.



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