Following on from last week’s article, HMRC have now produced a Dividend Allowance factsheet confirming how the taxation of dividend income will change as from April of next year.
It verifies that individuals will not pay tax on the first £5,000 of their dividend income, no matter what non-dividend income they have. However, the dividend allowance will not reduce a person’s total income for tax purposes, ie the £5,000 allowance will count toward the basic rate or higher rate bands.
HMRC have produced a number of illustrations to demonstrate the way the allowance will work in different situations:
Individual receives less that £5,000 per year in dividends.
No tax due as it is within the Dividend Allowance.
Individual receives dividends of £600 from shares invested in an ISA.
Nothing changes. No tax is due on dividend income within an ISA regardless of the rate of tax a person pays.
Individual is in receipt of non-dividend income of £6,500 and dividends of £12,000.
After setting off the income of £6,500 against the personal allowance of £11,000, a net personal allowance of £4,500 is available to set against the dividend income. Add to this the dividend allowance of £5,000, then only £2,500 of income is taxable at the basic rate dividend tax of 7.5%.
Person receives non-dividend income of £20,000 and dividends of £6,000.
The personal allowance is used against non-dividend income but after setting off the dividend allowance, only £1,000 of dividends is taxable at 7.5%.
Individual receives non-dividend income of £18,000 and dividends of £22,000.
After setting off the personal allowance against non-dividend income, £7,000 is taxable at the basic rate of 20%. Of the dividend income of £22,000, only £17,000 is taxable at the dividend basic rate of 7.5% after setting off the dividend allowance.
Person has non-dividend income of £40,000 and dividends of £9,000.
Basic rate tax of 20% is levied on £29,000 of the non-dividend income (£40,000 – £11,000 personal allowance). There is £3,000 of the basic rate band still available (£32,000 – £29,000) but this will count towards the dividend allowance. The remaining £2,000 of the dividend allowance will be used in the higher rate band but essentially £5,000 is not subject to tax, although £4,000 is taxable at the higher dividend tax rate of 32.5%.
HMRC say that this “simpler system” will only affect those with significant dividend income, who will pay more tax. An investor with modest income from shares will either see a reduction in tax or no change in the amount they owe.
Using the illustration from last week’s article, lets see how our contractor Kate will be affected if she receives salary equivalent to her personal allowance and dividends of £70,000 for the current and following tax year.
|Less: Personal allowance||(10,600)||(11,000)|
£31,785 @ 10% = 3,178
£45,993 @ 32.5% = 14,948
Total = 18,126
Less: dividend tax credit (7,778)
Total = 10,348
£5,000 @ 0% = 0
£27,000 @ 7.5% = 2,025
£38,000 @ 32.5% = 12.350
Total = 14,375
*Dividend grossed up by 10% tax credit of £7,778.
Kate’s income tax bill will increase by just over £4,000 if she maintains the same policy of profit extraction, so some rethinking will need to be done in 2016/17.
What is clear from this illustration is that the revamping of dividend taxation was not about simplification but rather tax raising.
The factsheet can be found by visiting Gov.uk