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Dividend Tax Changes from April 2016- £5000 dividend allowance, Increased tax

Abul Nurujjaman, 



From April 2016, the personal allowance is £11,000 and there is a further £5000 dividend allowance where you don t need to pay any further tax. 


In simple words, if you have a total income of £16,000 which includes £5000 of dividends, you don t need to pay any tax. To simplify this, we can say, you don t need to pay tax for first £5000 of dividend income regardless of your non-dividend income.

 

Channel S News Report on 30 December 2015.

 

Terms you should be familiar with:

 

 

  • Dividend Tax Credits ( Terms in use, last year in use is 2015/2016)
  • Dividend Allowance ( New term will replace Dividend Tax Credit from April 2016)

 

What is the existing Dividend Tax (year 2015/16)?

 

  • 10% (basic rate)
  • 32.5% (higher rate)
  • 37.5% (additional rate)

What is the new dividend Tax from April 2016 (year 2016/17)?

The Dividend Allowance from April 2016 (year 2016/17) is £5000. So you’ll pay tax on any dividends you receive over £5,000 at the following rates:

  • 7.5% (basic rate band)
  • 32.5% (higher rate band)
  • 38.1% (additional rate band)


Who will have the new Dividend Allowance from April 2016 ( from year 2016/17)

  • The Dividend Allowance is available from April 2016 ( year 2016/17) to anyone who has dividend income.

 

What will be the situation after changes take place from April 2016( from year 2016/17)?


From April 2016, the personal allowance is £11,000 and there is a further £5000 dividend allowance where you don t need to pay any further tax. 


In simple words, if you have a total income of £16,000 which includes £5000 of dividends, you don t need to pay any tax. To simplify this, we can say, you don t need to pay tax for first £5000 of dividend income regardless of your non-dividend income.


We will clarify this more using HMRC examples. Please see below some examples are given by HMRC:


Examples (HMRC)

The way the allowance will work in different situations is demonstrated in the examples below.

Where appropriate to the calculations, the examples use the limits that will apply from April 2016:

  • Personal Allowance: £11,000
  • Basic Rate Limit: £32,000
  • Higher Rate Threshold: £43,000

Example 1:

“I receive less than £5,000 per year in dividends”

From April 2016 you won’t have to pay tax on your dividend income as it is within your new Dividend Allowance.

 

Example 2:

“I receive dividends of £600 from shares invested in an ISA

As is the case now, no tax is due on dividend income within an ISA, whatever rate of tax you pay.

 

Example 3:

“I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA

With a Personal Allowance of £11,000, £4,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5%) on £2,500.

 

Example 4:

“I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA

You won’t need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5%.

 

 Example 5:

“I have a non-dividend income of £18,000, and receive dividends of £22,000 outside of an ISA

Of the £18,000 non-dividend income:

  • £11,000 is covered by the Personal Allowance
  • the remaining £7,000 to be taxed at Basic Rate

Of the £22,000 dividend income:

  • the Dividend Allowance covers the first £5,000
  • the remaining £17,000 of dividends to be taxed at the Basic Rate (7.5%)

Example 6:

“I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA

Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate.

This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax.

The remaining £4,000 of dividends are all taxed at higher rate (32.5%).

Who are not effected by the new Dividend Tax changes from April 2016 (Year 2016/17)

 

  • Dividends received by pension funds that are currently exempt from tax
  • Dividends received on shares held in an Individual Savings Account (ISA) will continue to be tax free.

 

Please CONTACT US  for further consultation. 

 

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