The way in which dividends are taxed in the UK has changed significantly in the last few years and what was once seen as an effective way of managing remuneration in a tax-efficient manner has come under intense scrutiny.
Up until April 2016, Dividends were paid net of a 10 per cent notional tax credit, meaning that recipients of income from dividends were taxed as follows:
| Rate | Effective Rate | |
| Within Basic Rate Band | 10% | 0% |
| Within Higher Rate Band | 32.5% | 25% |
| With Additional Rate Band | 37.5% | 30.56% |
However, after this date the tax credit was abolished and has since been replaced with the Dividend Tax Allowance of £5,000. This means that the first £5,000 of dividend income is tax-free, after which dividend recipients are taxed as follows:
| Rate | Effective Rate | |
| Within Basic Rate Band | 7.5% | 7.5% |
| Within Higher Rate Band | 32.5% | 32.5% |
| With Additional Rate Band | 38.1% | 38.1% |
However, to make matters worse for dividend holders the Chancellor announced in the March 2017 Budget that the Allowance would be reduced again from £5,000 to £2,000 from 6 April 2018. The impact of the changes over a range of incomes over the personal allowance is illustrated as follows:
- Other Income £20,000, Dividend Paid £10,000.
- Other Income £50,000, Dividend Paid £20,000.
- Other Income £150,000, Dividend Paid £30,000.
| Tax Year | 2015/2016 | 2016/2017 | 2018/2019 |
| Option a | £0 | £ 375 | £ 600 |
| Option b | £5,000 | £ 4,875 | £5,850 |
| Option c | £9,167 | £ 9,525 | £10,668 |
The effect of the change between the regimes in 2015/2016 will mean that individuals who were in basic rate paying no tax will have a dividend tax liability for the first time in recent years.
The reduction of the dividend allowance from £5,000 to £2,000 will further increase a basic rate taxpayers’ liability by £225 (£3,000 at 7.5 per cent), higher rate by £975 (£3,000 at 32.5 per cent) and additional rate by £1,143 (£3,000 at 38.1 per cent).
If you are unsure of your position and feel that you might be affected by these changes, please do not hesitate to contact our experienced and award winning tax team.
