How Does The New Dividend Tax Work?

by Alex Wolfe | share | tweet | connect
In George Osborne's recent budget he announced a new tax on share dividends. Having received calls from a number of clients keen to understand more about how this will affect them I felt a brief post about this would be beneficial (see below) although I would urge any clients to contact us directly with any concerns or further questions.
How will the new tax work?
The first £5,000 of dividend income in each tax year will be tax-free. Any income above this will be taxed at 7.5 per cent for basic-rate taxpayers, 32.5 per cent for higher-rate taxpayers and 38.1 per cent for additional-rate taxpayers.
When Does This Tax Effect From?
From April 6, 2016.
How Do I Pay The Tax?
This tax is not deducted at source. Individual taxpayers must use self-assessment to pay any tax due.
Who Will Be Worse Off?
As you would expect this has been designed to boost the Government's coffers and so many people will pay more, significantly basic-rate taxpayers who receive more than £5,000 in dividends.
Higher-rate taxpayers with £5,000 or less in dividend income are set to benefit and likely pay less as currently they pay 25 per cent on the whole sum (or £1,250), while under the new regime there will be no tax to pay, thanks to the £5,000 allowance.
If My Dividend Income Is Within The Tax-Free Personal Allowance Do I Still Have To Pay?
Dividend income is still included within the personal allowance. Someone with £16,000 dividend income would see the first £11,000 covered by the personal allowance and the next £5000 by the new dividend allowance and therefore pay no tax.
For advice on what to do about minimising the effects of the new tax, talk to our team
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