Dividend Allowance Explained – MMV302

Yet another big change to personal income tax from April 2016 is the new dividend allowance. If you hold shares or funds outside an ISA or pension, or if you are a company owner who pays yourself in dividends, you will need to watch this video:

Dividend Allowance explained

Put simply, the first £5,000 of dividends from any source will be tax free from April 2016, but there are a couple of wrinkles you need to be aware of:

The first thing to know is that above the £5,000, the tax rates are changing. And, even though the dividend allowance of £5,000 is tax free, that amount is still added to your income for working out the rate of tax you’ll pay on the rest of your income. For more on this, check out this podcast and the cheatsheet you can download from there.

Those tax rates are:

  • Basic rate taxpayers: 7.5%
  • Higher rate taxpayers: 32.5%
  • Additional Rate taxpayers: 38.1%

Remember that shares and funds held within an ISA or a pension are tax free anyway. But now that you can receive all these dividends without paying tax, it might be worth considering holding some shares outside these tax wrappers to take advantage. Always take advice before making decisions like this though…

If you’re a business owner, and you pay yourself primarily through dividends, you will certainly be paying more tax than before April 2016. But this is still probably the most tax-efficient way of taking money out of a limited company.

For more information, plus some worked example, the Gov.uk factsheet on the dividend allowance is pretty good.

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