As of 1st April 2016 the rules regarding tax on dividends has changed, do you know the new rules? If not here is an outline of the changes and how it will affect you.
Dividend payments used to be subject to dividend tax credit but as of 1st April 2016 this is no longer the case. The dividend tax credit has been replaced with a tax free dividend allowance. This means that the first £5000 of dividend payments (in a tax year) are tax free regardless of how much dividend income you receive. Any dividend income after the first £5000 will be subject to tax but how much depends on how much you earn.
You’ll pay tax on any dividends you receive over £5,000 at the following rates:
- 7.5% on dividend income within the basic rate band (up to £32,000)
- 32.5% on dividend income within the higher rate band (over £32,000 and up to £150,000)
- 38.1% on dividend income within the additional rate band (0ver £150,000)
So what does this mean for you? The new rules mean that anyone who receives dividend income will now pay more tax on that income that they have done previously. However, the amount of tax you pay is still lower than the rate of income tax for employees. If you haven’t done so already it may be a good idea to have a chat with your bookkeeper/accountant about the new rules and exactly how it affects you. You can then put some sensible tax planning into place.