Time to get ready for new dividend Allowance and rates of tax

As we head towards the end of the current tax year more details have recently been provided about the new rates of income tax on dividends and the new Dividend Allowance which will apply to dividends once the 2016/17 year begins after 6 April 2016.

It certainly is a topic affecting accountancy firms and businesses nationwide and in Solihull we are no different.

For those of you who may have forgotten the rates of income tax on dividends, they are as follows:

  • 5% for dividend income within the basic rate band (ordinary rate)
  • 5% for dividend income within the higher rate band (upper rate)
  • 1% for dividend income within the additional rate band (additional rate)

Also, there will be a new Dividend Allowance of £5,000 where the tax rate will be 0%, which is the dividend nil rate. This Dividend Allowance will apply to the first £5,000 of an individual’s taxable dividend income and is in addition to the personal allowance.

Please bear in mind where an individual receives company dividend income that would otherwise be chargeable at the dividend ordinary, upper or additional rate, and the income is less than or equal to £5,000, the nil rate will apply to all of the dividend income.

Also, where the dividend income is above £5,000, the lowest part of the dividend income will be chargeable at 0%, and anything received above this £5,000 is taxed at the rate that would apply to that amount if the dividend nil rate did not exist.

So in calculating the tax band into which any dividend income over the £5,000 allowance falls, savings and dividend income are treated as the highest part of an individual’s income.

In cases where an individual has both savings and dividend income, the dividend income is treated as the top slice.

This example below shows how the new Dividend Allowance and rates will work:

Bill has a salary of £38,500 and dividend income of £7,000 in 2016/17. Therefore, total income is therefore £45,500. The total of his personal allowance and basic rate band comes to £43,000. Therefore, part of his dividend income would be taxed at the upper rate were it not for the operation of the new dividend nil rate.

So £5,000 will be taxed at 0% and £2,000 will be taxed at the upper rate of 32.5%

It is somewhat of a change and will take some getting used to.

Please ask if you need any help.   We at AIT Accountants & IT are only too happy to assist.