The 10% dividend tax credit on UK dividends ceased on 6 April 2016. Previously, this was considered to be sufficient tax charge for a basic rate taxpayer, who had no further tax to pay. Higher and additional rate taxpayers declared their dividend income to HMRC and were subject to additional tax charges.
Instead, a Dividend Allowance has been introduced, allowing individuals to earn £5,000 of dividend income free of tax. (The Government has annouced that this amount will be reducing to £2,000 from April 2018).
Dividends received in excess of the £5,000 allowance will be subject to income tax, dependent on the individual’s personal tax status.
- Basic Rate taxpayers will be charged 7.5% on dividend income exceeding the £5,000 allowance.
- Higher Rate taxpayers will be charged 32.5% on dividend income exceeding the £5,000 allowance
- Additional Rate taxpayers will be charged 38.1% on dividend income exceeding the £5,000 allowance.
This measure will have no impact on tax-efficient products such as ISAs and SIPPs, which continue to earn dividends with no further tax charges, outside of the new dividend allowance.
For more information, please refer to the government website.
Income Tax Personal Allowance
Both the Personal Savings Allowance, and the Dividend Allowance are in addition to the Income Tax Personal Allowance, which increased to £11,500 for 2017/2018.
Whilst the dividend and savings income earned by an individual may be within the respective allowances, income from all sources (including savings interest and dividends) will be included by HMRC when calculating tax levels. This may therefore affect the level of savings allowance individuals are entitled to.
When calculating which tax band income received (in excess of the allowances) falls into, savings and dividend income are treated as the highest part of an individual’s income. Where both savings and dividend income have been earned, the dividend income is treated as the top slice.
Following the Budget announcement on 16 March 2016, tax will continue to be deducted from funds and other interest bearing products until 2017. Any tax deducted for the tax year 2016/17 will need to be reclaimed from HMRC if within an investor’s Personal Savings Allowance.