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How the new dividend tax works

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A Fact Sheet, published by HMRC, explains how the new system of taxation on dividends will work. This is really useful for those who own their own limited company.

The fact sheet can be found at: www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet

Examples

Example six is really interesting ……

“I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA”

How much tax?

From 2016 / 2017 the personal allowance will be £11,000.

Tax will be paid at the basic rate of 20% up to £32,000 after deducting the personal allowance i.e. the higher 40% rate of taxation kicks in at income in excess of £43,000.

The first £5,000 of dividend income will not attract taxation.

This is how the tax free dividend allowance could have worked

In the example the total income subject to taxation could be:

£40,000 less the personal allowance of £11,000 = £29,000

Plus

£9,000 less the dividend allowance of £5,000 = £4,000

Total income = £33,000 which is £1,000 of income over the higher rate threshold

So £1,000 of the £4,000 taxable divided income would attract dividend tax at 32.5% and the remaining £3,000 would be taxed at 7.5% = taxation of dividend of £550.

THIS IS INCORRECT

But this is how the tax free dividend allowance actually works

According to the HMRC Fact Sheet the dividend tax is calculated as follows:

[Quoted directly from the fact sheet]

“Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate. This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax. The remaining £4,000 of dividends are all taxed at higher rate (32.5%).”

So the taxation of the dividend is actually £1,300; more than double how it could have been calculated.

The devil is most certainly in the detail.

 

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