New Dividend Regime - The £5,000 dividend allowance

We are looking in more detail at the £5,000 dividend allowance, which is fairly straight forward – from 6 April 2016 the first £5,000 of dividend income is covered by the dividend allowance and dividends above this amount are taxable, but there are a few points to consider.

  • The dividend allowance does not reduce taxable income. Any dividend income over and above the first £5,000 is taxed as if the £5,000 has used up either the basic rate band or the higher rate band. An example will help to illustrate this:

    Consider a taxpayer with the following income: 

      £
Earned income 10,000
Dividend income 40,000
  50,000
Personal allowance (11,000)
Taxable income 39,000

In this example the taxable dividend is £39,000, but we do not deduct the £5,000 from this amount. The £5,000 dividend allowance forms part of the basic rate band.
£39,000 dividend less £32,000 basic rate band leaves £7,000 taxable at higher rates. Tax on the dividend would therefore be:  

     £
0% on £5,000    0
7.5% on £27,000 2,025
32.5% on £7,000 2,275
  4,300
  • Because the dividend allowance does not reduce taxable income, the full dividend is included when calculating income for abatement of child benefit (income over £50,000) and for reduction of personal allowance (income over £100,000). Some taxpayers will benefit from the change as dividend income is no longer grossed up
     
  • The new savings allowance of £5,000 introduced from 2015/16 is not available against dividend income, only interest or similar. The new personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers due to commence from 2016/17 will also not be available against dividend income
     
  • The dividend allowance applies to all dividend income so if someone has a portfolio of shares as well as shares in their own trading company then dividends received on the share portfolio will use up some of the dividend allowance
     
  • Dividends from shares held within an ISA and dividends received by a pension fund continue to be tax free, so this may be a good planning opportunity to review investments.

A simple example of the extra tax that might be payable on £5,000 worth of dividends highlights how effective holding shares within an ISA could be. 
Consider a typical business owner that has already taken over £5,000 of dividends from their business and receives a further £5,000 from their personal share portfolio. 
The extra tax due on these dividends in the current tax year and once the new dividend rules are introduced would be as follows: 

  2015/16 2016/17
Basic rate taxpayer    £0    £375
Higher rate taxpayer £1,250 £1,625
Additoonal rate taxpayer £1,530 £1,905

If you require any assistance with the new dividend regime, please contact Sharon Ryan at sharon.ryan@armstrongwatson.co.uk and steven.holmes@armstrongwatson.co.uk.

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