Dividends – The Old and the New Explained

The Old – Effective till April 5, 2015:
10% tax is deducted at source and treated as tax credit if there is additional tax liability. Essentially, basic-rate taxpayers pay nothing extra on the dividend they receive whilst higher-rate and additional-rate taxpayers pay 32.5% and 42.5% respectively, less the tax credit.

The New – Effective April 6, 2016:
No deduction at source. The first £5000 is tax-free. Anything above this is taxed at 7.5% for basic-rate taxpayers, 32.5 per cent for higher-rate taxpayers and 38.1 per cent for additional-rate taxpayers.

Losers:
Basic-rate taxpayers with over £5000 dividends will have to pay tax on the excess whereas at the moment, there is nothing to pay.

Winners:
Higher-rate and Additional-rate taxpayers will benefit from not having to pay tax on the first £5000 of their dividend income regardless of how much their earned income is.

Good to Know:
In the absence of other income, dividends will have to reach a level where the personal allowance and the £5000 allowance are used up before tax kicks in. A good case for bringing a low earning spouse on board perhaps.