Dividend Tax Explained

Question:
“Prior to April 2017, I only received one tax bill which was my corporation tax. I was under the impression that income under £42k was tax free after the corporation tax had been paid. Why do I now have a ‘dividend tax’ bill also and paying more tax?”

Answer:
The Finance Act 2016 included major changes to the way dividends were taxed, with an increase by effectively 7.5% across the board.


Actually, Prior to April 2016 dividends had a 10% tax rate up to £42k, but this was added back as a tax credit so many tax payers did not see this tax. George Osborne introduced the increased tax to bring small limited company taxes closer to the unincorporated businesses (up to 45% tax and 9% national insurance) and employment taxes (up to 45% tax and 25.8% national insurance).

This change has affected most limited company freelancers, contractors and small businesses as well as anyone who has dividend income from investments (stocks and shares).

In summary, from the 16/17 tax year (6th April 2016 onwards) any dividends in your personal allowance (£11k is the standard personal allowance for 16/17) will remain tax free.

Your next £5,000 of dividends will also be tax free (the 'dividend allowance'). This generally takes someone’s income up to £16,500 with only paying a small national insurance bill.

After that any additional dividends that remain in the basic tax band (below £43k) will be taxed at 7.5% and any dividends above £43k will be taxed at 32.5% (was 25% before).

If your dividends go above the upper rate of tax (£150k of earnings), the element of dividend above £150k are taxed at 38.1%.