Understanding how the new dividend tax rules work is crucial to all small business owners. If you take most of your income as dividends your tax payment will increase. For some, it may be the first personal tax payment you have made for many years.
The new rules for dividend tax include an ‘allowance’ of £5,000 before tax is applied to the dividends. HMRC guidance says the allowance, ‘will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive.’ An interesting and important point. Effectively this is a zero rate band rather than an exemption. It works in exactly the same way as your personal allowance (£11,000 in 2016/17).
So let’s look at some examples
All of the above examples use income levels within the basic rate band which is £32,000 in 2016/17.
Where income is higher and is a mix of sources the allowance will still be applied to the first £5,000 of dividends and dividends are taxed LAST. Here’s an example to illustrate.
Income from salary £ 8,000
Income from rental property £20,000
Total Income £58,000
The personal allowance is absorbed by the salary and rental income. £17,000 of the rental income falls to be taxed in the basic rate band leaving £15,000 of the basic rate band available for dividends. £5,000 of the dividends is tax free but uses up £5,000 of the basic rate band, leaving £10,000 dividends to be taxed at basic rate and the remaining balance of £20,000 taxed at the higher rate.
You can see that for the dividend allowance to save you tax at the higher or additional rate you need to have other income which uses up all of your basic rate band. In 2016/17 this other income would have to be £43,000 before dividends.
Be sure you understand now how the new dividend tax rules will affect you so you don’t get a nasty surprise when your personal tax is calculated. Call Carole Jordan FCCA on 01273 882200 for specific advice on your situation.
All details above were correct at the time of publishing - for more up to date information please
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