A new UK Dividend Tax calculation starts on 6th April 2016
This web page introduces the new Dividend Tax calculation for individuals, and also describes the outgoing 10% Notional Tax method.
An individual Shareholder
in the UK is taxed under Income Tax
Please read our Dividends
web page for more information regarding the legal aspects of Dividends.
New UK Dividend Tax Calculation (2016/17)
This new calculation takes effect from the Income Tax Year 2016/17 (6th April 2016 to 5th April 2017.
The 10% notional tax credit (see below) ceases.
A new tax free dividend allowance of £5,000 is introduced. The £5,000 tax free amount is valid for 2016/17 and 2017/18, but it may be reduced to £2,000 from 2018/19.
Dividends over the £5,000 allowance will be taxed as follows:
• 7.5% on Dividend income in the
Basic Rate 20% band.
• 32.5% on Dividend income in the
Higher Rate 40% band.
• 38.1% on Dividend income in the
Additional Rate 45% band.
The key words above are in the
- these are not separate Dividend bands.
The new Savings Allowance
of £5,000 is not available to use in the Dividend Tax Calculation.
Impact on Single Shareholder/Director Companies
The element of the new Dividend Tax calculation which is difficult to understand is how the £5,000 0% allowance for Dividends interacts with the main Income Tax Basic and Higher Rate Bands.
Basically, for most single Shareholder/Directors, the Dividend £5,000 0% allowance reduces taxable Dividend in the Income Tax Basic Rate band.
For 2016/17, the Income Tax Bands are: (GOV UK Tax Banks and Rates)
Simple example to illustrate how Dividend Tax works within the Income Tax bands.
|Income Tax Band
||£0 to £11,000
||£11,000 to £43,000 (ie. £32,000)
||£43,000 to £150,000
Note that the tax rules require that the Personal Allowance is firstly set against the Salary, then any "unused" Personal Allowance can be set off against Dividends:
During 2016/17, a single Shareholder/Director receives a Dividend of £38,000 and a Salary of £8,000:
||(Income Tax Bands)
|Dividend Taxed in the Basic Rate Band
||(Income Tax Bands)
|Dividend taxed in the Basic Rate Band
||@   7.5% = £2,025
|Dividend taxed in the Higher Rate Band
||@ 32.5% =    £975
|Total Tax on Dividends
In the above example, all the Taxable Income is Dividend, because the Salary is lower than the Personal Allowance.
If the old Dividend system had carried on into 2016/17, and with the new 2016/17 Personal Allowance and Tax Bands, the tax to pay on Dividends would have been £1,625, compared to it actually being £3,000. Therefore, on a 'like for like' basis, for the example above, the additional tax on Dividends is £1,375.
Dividends and Income Tax - The 10% Notional Tax Method
The notional tax method in the UK is ending.
The last year for the notional tax method is 2015/16 (6th April 2015 to 5th April 2016).
Under the notional tax system, Dividends
are treated as 10% Income Tax
For example if you receive a Dividend of £90, ie. that is the money you received, then this is regarded as a Gross Dividend of £100 with £10 Income Tax already taken off, ie. the £90 you received is Net.
If a person is just a basic rate tax payer, the Income Tax rate for Dividends is just 10%, so there would be no more tax to pay.
If, for some other reason of personal income, and taking into account the Personal Allowance
, a person is not a tax payer, then the notional tax would not be refunded.
If a person is a higher rate tax payer, then Dividends will be taxed at the higher rate, but the 10% deducted will still be regarded a payment towards the final tax payable.
A person will pay additional Income Tax on Dividends if their total personal income goes over the higher rate (40%) or additional rate (45%).
2015-16 Dividend Rates:
• Dividends in the standard rate band: 10% of the Gross Dividend. Due to the notional tax, no additional tax is payable.
• Dividends in the higher rate band (income over £42,385): 32.5% of the Gross Dividend, less the 10% tax credit deemed to have been already paid.
• All Dividends at the additional rate (income over £150,000) are taxed at 37.5% of the Gross Dividend, less the 10% tax credit deemed to have been already paid..
GOV UK Tax Banks and Rates