DIVIDEND TAX - FROM APRIL 2018

The dividend allowance means that you won’t have to pay tax on the first £2,000 of dividends (2017/18 £5,000)  received in a tax year.

 From 6 April 2018 you will pay tax on any dividends you receive over £2,000 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

Whilst this is a simpler system than the old one ( pre 5th April 2016)  it means that those with significant dividend income will pay more tax.  Despite this increase in tax on dividends working via a limited company continues to provide increased take home pay than working via an umbrella company or PAYE.

(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.)

Please note that 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 £2,000 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 £2,000 allowance.

Examples

Using the rates that will apply for 2018/19:

  • Personal Allowance: £11,850
  • Basic Rate Limit: £34,500
  • Higher Rate Threshold: £46,350
Example 1

 “I receive a director’s fee of £8,424 and dividend income of £12,000 from my company”

 The salary of £8,424 is more than covered by the personal allowance of the same amount. The excess personal allowance  of £3,426 is offset against the dividend income, leaving £8,574 taxable.  Once we deduct the £2,000 dividend allowance from dividends, then the residual amount  of £6,574 is taxable at 7.5% basic dividend rate. You will therefore pay £493.05 of tax. 

Example 2

 “I receive a director’s fee of £8,424 and receive dividends from my company of £40,000.

 The salary of £8,424 is more than covered by the personal allowance of the same amount. The excess personal allowance  of £3,426 is offset against the dividend income, leaving £36,574 taxable.

The £36,574 is taxable as follows:

 £34,500 falls in the basic rate band.  After deducting the £2,000 dividend allowance, £32,500 remains taxable at the basic rate of 7.5%.  The excess of £2,074 falls in the  higher rate tax band and is taxed at 32.5%.  You will therefore pay £3,111.55 of tax.

Example 3

 “I have a received a salary of £8,424 from my company, £7,000 income from property and receive dividends of £22,000.”

 Of the £15,424 non-dividend income:

 - £11,850 is covered by the Personal Allowance

 - the remaining £3,574 to be taxed at Basic Rate

 Of the £22,000 dividend income:

 - the Dividend Allowance covers the first £2,000

 - the remaining £20,000 of dividends to be taxed at the Basic Rate (7.5%)

Example 4

I receive a salary of £40,000 and also receive £9,000 in respect of my company dividends.

 Of the £40,000 non-dividend income, £11,850 is covered by the Personal Allowance, leaving £28,150 to be taxed at basic rate.

 There is £9,000 dividends left to be taxed.

 We can offset £2,000 of the dividend allowance to use up our basic rate band up to £30,150, with  £4,350  of dividends being taxed at the basic rate band. The remaining £2,650 is taxed at 32.5% as it falls in the higher rate band.

Paying a dividend –prior to 5th April  2016

 

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