Dividend nil-rate

From April 2016, the dividend tax credit will be replaced by a new tax-free Dividend Allowance.

This means that a person will not have to pay tax on the first £5,000 of dividend income, regardless of the level of non-dividend income. Headline rates of dividend tax are also changing, with tax charged on dividends received over £5,000 at the following rates:

• 7.5% on dividend income within the basic rate band
• 32.5% on dividend income within the higher rate band
• 38.1% on dividend income within the additional rate band

Investors with modest income from shares will see either a tax cut or no change in the amount of tax owing.

The Dividend Allowance will not reduce total income for tax purposes, and dividends within the allowance will still count towards the appropriate basic or higher rate bands. They may therefore affect the rate of tax payable on dividends received in excess of the £5,000 allowance.

Example 1

This is a quite straightforward example, showing the taxable amounts after allocating the relevant allowances to the two types of income.

Example 2

This example is more complicated, in that it splits the dividend allowance into two - £3,000 to use up the balance of the basic rate band and £2,000 to 'eat into' the higher rate band.