Dividends are currently taxed at special rates with a notional 10% non-refundable tax credit.
As previously announced, Finance Bill 2016 will include 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. 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.
The introduction of the dividend allowance will provide an opportunity for those receiving small amounts of dividends to benefit from the changes. However, those who receive dividends in excess of £5,000, which includes many owners of small or medium-sized enterprises, may find their tax liability will increase from 6 April 2016.