The taxation of dividend income has been reformed since April 6th, 2016. Since then, dividends are paid gross – there is no longer any associated tax credit – and all taxpayers receive a dividend allowance.
Dividends not sheltered by the dividend allowance, or any available personal allowance, are taxed at the appropriate dividend rate of tax.
Our accountants in London are always on-hand to help and are experts when it comes to tax treatments under the UK tax system, including tax on dividends.
Need advice? Why not get in touch with the team to discuss how our wealth of experience can help you make the right decision when it comes to dividends.
Dividend allowance is available to all taxpayers, regardless of the rate at which they pay tax. Further to that, the amount of dividend allowance is the same regardless of the tax bracket into which the recipient falls.
Where the allowance is not otherwise utilised, it allows for tax-efficient extraction of profits from a family company.
Although termed an “allowance”, the dividend is really a zero-rate band, with dividends covered by the allowance being taxed at a rate of 0%. Significantly, dividends covered by the allowance form part of band earnings.
The dividend allowance is set at £2,000 for 2018/19; a reduction of £3,000 from the £5,000 dividend allowance that applied for the two previous tax years.
Assuming dividends of at least £5,000 are paid in 2017/18 and 2018/19, the reduction in the dividend tax allowance will increase the tax payable by £225 for basic rate taxpayers, by £975 for higher rate taxpayers and by £1,143 for additional rate taxpayers.
It’s important to note dividend income has its own tax rates beyond the allowance.
Dividend income is taxed at 7.5% (dividend ordinary rate) to the extent that it falls in the basic rate band, at 32.5% (dividend higher rate) to the extent that it falls in the higher rate band, and at 38.1% (dividend additional rate) to the extent that it falls in the additional rate band.
For 2018/19, the basic rate band covers the first £34,500 of taxable income. The additional rate band applies to taxable income in excess of £150,000.
The bands are UK wide in their application to dividend income - the Scottish income tax bands apply only to non-savings, non-dividend income.
If the personal allowance has not been fully used elsewhere, bearing in mind dividend income has the last call, any unused portion of the allowance can be set against dividend income.
The personal allowance is £11,850 for 2018/19, although it is reduced by £1 for every £2 by which income exceeds £100,000.
In 2018/19, Declan receives a salary of £25,000 and dividends of £30,000. His personal allowance of £11,850 and the first £13,150 of his basic rate band is used by his salary, on which he pays tax of £2,630.
The first £2,000 of his dividends is covered by the dividend allowance and is tax-free. However, the allowance uses up £2,000 of his basic rate band, leaving £19,350 available (£34,500 - £13,150 - £2,000).
The next £19,350 of dividends is taxed at the dividend ordinary rate of 7.5% and the remaining £8,650 (£30,000 - £2000 - £19,350) is taxed at the dividend higher rate of 32.5%.
The tax payable on his dividends is therefore £4,262.50 ((£2,000 @ 0%) + (£19,350 @ 7.5%) + (£8,650 @ 32.5%)).
Having an alphabet share structure in a family company allows dividends to be paid to family members to take advantage of their dividend allowance to extract profits tax-free.
To discuss planning your dividends and how they are taxed, get in touch with our tax experts today - we would be more than happy to help.