For dividends paid from investments or shares the taxation situation changes on 6th April. Dividends received in the 2015/16 tax year are taxable at 10% for basic rate taxpayers, 32.5% for higher rate taxpayers and 37.5% for additional rate taxpayers. All dividends, however, came with a 10% tax credit so basic rate tax payers had no further liability.
For the 2016/17 tax year, the 10% tax credit is being scrapped and everyone instead will have a £5,000 Dividend Allowance. So if you earn dividends of less than £5,000, these will not give rise to a tax liability, no matter what other income you have. However, if you receive more than this, tax will need to be paid on the excess through self-assessment.
Where dividend income is in excess of £5,000, basic rate tax payers will be liable to tax at 7.5% on the excess, whereas higher rate taxpayers will have to pay 32.5% and additional rate taxpayers 38.1% on the excess.
The net result of this is these changes is that they will have no impact on those with dividend income below £5,000, but anything above this will prove detrimental for basic rate taxpayers whereas higher rate tax-payers will not be worse off unless their dividend income exceeds £21,667. The most important factor is to know when to submit a tax return and what to disclose as failure to declare what’s due and paying it on time could lead to hefty fines.
Financial planning which considers all of your investment assets, how they are held, and in what investment vehicle, allows tax efficiencies to be uncovered. For example, tweaks to the type of investments held or, moving dividend paying investments into an appropriate tax wrapper could mean the difference between paying a lot of tax or no tax.