New UK Dividend Tax Calculation

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 receiving Dividends 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.

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)

Income Tax Band	Tax Rate	Income Range
Personal Allowance	0%	£0 to £11,000
Basic Rate	20%	£11,000 to £43,000 (ie. £32,000)
Higher Rate	40%	£43,000 to £150,000
Additional Rate	45%	over £150,000

Simple example to illustrate how Dividend Tax works within the Income Tax bands.

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:

Salary	£8,000	A
Dividend	£38,000	B
Total Income	£46,000	C (A+B)
Personal Allowance	£11,000	D	(Income Tax Bands)
Taxable Dividend	£35,000	E (C-D)
Dividend Taxed in the Basic Rate Band	£32,000	F	(Income Tax Bands)
Dividend Allowance	£5,000	G
Dividend taxed in the Basic Rate Band	£27,000	H (F-G)	@   7.5% = £2,025
Dividend taxed in the Higher Rate Band	£3,000	I  (E-F)	@ 32.5% =    £975
Total Tax on Dividends			£3,000

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 already paid.

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..

Links

GOV UK Tax Banks and Rates