The rules for taxing dividends changed radically from 6 April 2016 with the removal of the 10% notional tax credit and the introduction of new rates of tax on dividends. For many taxpayers there will be more tax to pay on those dividends on 31 January 2018.
Do you know how the rate changes affect you?
Up until 5 April 2016, the 10% dividend credit meant that basic rate taxpayers paid no tax at all on dividend income as the 10% tax on dividends was covered by the 10% tax credit. For example, where a basic rate taxpayer received £9,000 dividends, this would be treated as £10,000 gross income but the 10% tax of £1,000 would be covered by the £1,000 tax credit.
From 6 April 2016 for a basic rate taxpayer the same £9,000 dividend would now be taxed at 7.5%. There is a new £5,000 dividend allowance which once has been used leaves £4,000 to be taxed at 7.5%, making £300 tax due on 31 January. Previously nothing would have been due.
Where dividends are received by a higher rate taxpayer, the loss of the 10% tax credit means that the original 25% rate and now an additional 7.5% dividend tax rate makes 32.5% applicable to dividends in excess of the £5,000 allowance.
Thus, if a higher rate taxpayer received £30,000 of dividends, £25,000 of those dividends will now be taxed at 32.5% meaning £8,125 due on 31 January 2018. Last year the tax on the same dividends would have been £7,500 being 25% of the £30,000.
Not sure how the tax rates on dividends will impact your January tax bill?
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