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What are the new dividend tax rates?

 

From 6th April, only the first £5,000 of dividends withdrawn will be considered tax-free and the rest will be taxable.

This is a big change compared to previous tax years when a director could receive dividends as a basic rate taxpayer, and effectively pay no personal income tax.
 

How it's calculated under the new rules

You are entitled to a personal allowance of £11,000 a year from April 2016. For example, if you were to take £8,060 in salary, then you’ll be able to take up to £2,940 in dividends without incurring tax on top of the £5,000 tax-free.

You won’t pay personal income tax on a salary of up to £8,060 and dividends up to £7,940 (£2,940 plus the £5,000 tax-free dividend allowance). Following on from this, you’ll be taxed at the rate of 7.5% on the next £27,000 worth of dividends. Up to this point you’ll pay £2,025 in personal income tax.

After your total dividends are above £34,940 (£27,000 plus £7,940) you will incur the higher rate dividend tax of 32.5%. Because of these changes, it’s important that you utilize any allowances for the 15/16 tax year before 5th April. However this will vary if you have any additional income.

If you’re going to take £40,000 in dividends for the next tax year (which’ll put you £5,060 into the higher rate category), then you would incur £1,644.50 in personal income tax. This assumes your total accumulated salary is £8,060.

For Additional Rate taxpayers (those earning over £150,000), dividends are taxed at 38.1%.


Basic rate example.

Salary

8,060.00

 

Dividends

27,952.00

 

Total income

36,012.00

 

Personal allowance

11,000.00

 

Taxable income

25,012.00

 

Dividends @ 0%

5,000.00

0.00

Dividends @ 7.5%

20,012.00

1,500.90

Income tax due

 

1,500.90



Additional rate example

Salary

8,060.00

 

Dividends

51,952.00

 

Total income

60,012.00

 

Personal allowance

11,000.00

 

Taxable income

49,012.00

 

Dividends @ 0%

5,000.00

0.00

Dividends @ 7.5%

27,000.00

2,025.00

Dividends @ 32.5%

17,012.00

5,528.90

Income tax due

 

7,553.90


Note: these examples are dependant on taking a salary up to the National Insurance Threshold (£8,060 - which is exactly the as same the 2015/16 tax year). If you take more than this and want more information about planning personal tax liabilities,

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