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New rules on dividends has tax implications
In the year to 5th April 2017, if you intend to receive dividends from a company, then you will be aware that from April 2016 there have been some changes to the way dividends are taxed in that the Dividend Tax Credit has been replaced by a new tax-free Dividend Allowance. Mark Witt alerted you to this in the last issue, but it is worth reiterating in a bit more detail.
The Dividend Allowance means that you won’t have to pay tax personally on the first £5,000 of your dividend income, no matter what non-dividend income you have.
You’ll pay tax on any dividends you receive over £5,000 at the following 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
As you can see, this could have a significant impact on your own personal tax liability for the year to 5th April 2017.
To only utilise the 0% rate of tax, you would need to receive no more than £5,000 worth of dividends in the year, resulting in £0.00 tax due personally. To only utilise the 7.5% basic rate of tax band, you would need to receive no more than £43,000 worth of dividends in the year, resulting in £2,025.00 tax due personally. To best utilise the 32.5% higher rate of tax band before you start to lose £1 of the personal allowance for every £2 above £100,000, you would need to receive no more than £100,000 worth of dividends in the year, resulting in £20,550.00 tax due personally.
Once the total income exceeds £150,000 any income from dividends will be subject to 38.1% tax personally.
It is worth noting that the current rules for Self Assessment Tax Returns are that if an individual has a tax liability of more than £1,000 and less than 80% of this tax liability is collected at source, then HMRC would expect the individual to make a payment on account of the following tax year.
If you are in any doubt about your position in relation to this issue, please talk to your usual Thomas Croft contact as soon as possible.