38.1% on dividend income within the additional rate band
Dividends received on shares held in an ISA will continue to be tax free.
This measure reduces the incentive for some people to set up a company and make payments as dividends rather than as wages simply to reduce their tax bill, enabling the government’s plan to reduce the rate of Corporation Tax to 18% by 2020. The measure is intended to modernise, reform and simplify dividend taxation, creating a fairer system. Only those with significant dividend income, or those who are able to pay themselves dividends in place of wages, will pay more tax and, according to the Government, around 1 million individuals will pay less tax on their dividend income.
The current system provides that a recipient of a dividend will receive a tax credit, equal to one ninth of the dividend value. This tax credit can be set against the person’s liability to tax on dividend income for that tax year and covers the full tax liability where dividend income falls within the basic rate band or below. The tax credit can’t be reclaimed by a non-taxpayer and further tax is due on gross dividends falling within the higher or additional rate tax bands.
The new £5,000 Dividend Allowance is in addition to the provisions for ISAs and the tax-free personal allowance. The dividend allowance will apply to dividends received from UK resident and non-UK resident companies.
As explained above under Personal Savings Allowance, dividend income that is within the dividend allowance (and savings income within the new personal savings allowance) will still count towards an individual’s basic or higher rate limits - and may therefore affect the level of savings allowance that they are entitled to, and the rate of tax that is due on any dividend income in excess of this allowance.
In calculating into which tax band any dividend income over the £5,000 allowance falls, savings and dividend income are treated as the highest part of an individual’s income. 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’.
