From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance.
The Dividend Allowance means that you won’t have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.
The allowance is available to anyone who has dividend income.
Headline rates of dividend tax are also changing.
You’ll pay tax on any dividends you receive over £5,000 at the following rates:
7.5% on dividend income within the basic rate band
32.5% on dividend income within the higher rate band
38.1% on dividend income within the additional rate band
This simpler system will mean that only those with significant dividend income will pay more tax.
If you’re an investor with modest income from shares, you’ll see either a tax cut or no change in the amount of tax you owe.
Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA), will continue to be tax free.
From April 2016 you have to apply the new headline rates on the amount of dividends you actually receive, where the income is over £5,000 (excluding any dividend income paid within an ISA).
The Dividend 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.
Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.