Dividends are currently taxed at special rates with a notional 10% non-refundable tax credit.
Finance Bill 2016 includes legislation to repeal the dividend tax credit and to introduce a new dividend allowance of £5,000. In addition, new rates of income tax will apply as announced in the Summer Budget 2015. These new rates can be summarised as follows:
0% for the first £5,000
7.5% for dividends falling within the basic rate band
32.5% for dividends falling within the higher rate band
38.1% for dividends falling within the additional rate band.
Dividends received on shares held in ISA’s will remain tax free.
This change will mainly affect higher rate taxpayers with high dividend income who will now pay more tax. It is estimated that over 1 million individuals will benefit from the Dividend Allowance and pay less tax.