Change to the Dividend Allowance
Since 6th April 2016, all taxpayers have been able to receive £5,000 per year in dividend income tax-free, however as previously announced by the Government, this dividend allowance will reduce to £2,000 from the 6th April 2018.
Under the rules introduced on 6th April 2016, all taxpayers were eligible for the dividend allowance, enabling them to receive £5,000 in dividend income completely tax-free regardless of their other income. Dividends received above this amount are then subject to tax at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
From 6th April 2018, the dividend allowance will be reduced to £2,000.
The tax rates for dividends will remain unchanged, and so an individual receiving dividends of £5,000 or more in 2018/19 will have an additional tax liability of £225 if they are a basic rate taxpayer, £975 for a higher rate taxpayer and £1,143 for an additional rate taxpayer.
Therefore, if an individual was considering taking a dividend from their company and have not yet utilised their dividend allowance of £5,000 for 2017/18 tax year, then consideration should be given to paying a dividend before the 6th April 2018 in order to take advantage of the higher dividend allowance for 2017/18 and before it reduces to £2,000 for 2018/19.
The reduction in the allowance from 6th April 2018 could also means that even more individuals who have not previously had to complete a tax return will now have to register for Self-Assessment in order to declare and pay the tax on their dividends. In particular this is likely to impact on those individuals with investment portfolios and those with shares in family businesses.
However, it is possible that a Self-Assessment tax return may not be required for an individual who receives less than £10,000 in dividend income and pays tax through the PAYE system, as HMRC maybe able to adjust the individual’s tax code to collect the tax due on their dividend income through the payroll system.
If you have any questions regarding the changes to the dividend allowance, are in doubt about whether you may need to complete a tax return for 2017/18, or would like to explore the possibility of paying your tax on dividend income through PAYE please contact our Tax Director, Jenny Marks, for more information.
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