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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:
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|
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:
|Basic rate taxpayer||£0||£375|
|Higher rate taxpayer||£1,250||£1,625|
|Additoonal rate taxpayer||£1,530||£1,905|
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