Change of Dividend Legislation

Under the current legislation, dividends attract a 10% tax credit which means that basic rate tax payers pay no tax on £28,800 of dividend income (assuming all of the personal allowance has been used by on other income), while higher rate tax payers pay an effective rate of 25%.

This is because dividends are paid out of Company Profits after Corporation Tax has been paid.

From April 2016, this will be changing. The first £5000 of dividend income will be tax free. This is called the Dividend Allowance. After that, it will be taxed at 7.5% for basic rate tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate tax payers.

Typical Example:
Lewis has his own Limited Company. He takes a minimum salary of £8,060.00 with the remainder of his income, £12,000, as dividend income.

Personal Allowance for 16/17 year          £11,000
Dividend Allowance                               £5,000

Tax will be paid on £4,060.00 at rate of 7.5%         £304.50

This is the government factsheet on the Dividend Allowance – click here