Prior to its April update, the government viewed the taxation of dividends as a complex process that was in dire need of change. Many people were choosing to work via their own limited companies to save tax due to the high rate of corporation tax that was present at the time. 

These are the original rates at which your gross dividend amount would be taxed:

• 10% (basic rate)
• 32.5% (higher rate)
• 37.5% (additional rate)

As of the changes made in April, all are entitled to a dividend income of £5,000 with no tax liability. So in conclusion, if you earn £16,000 or less per year, dividend tax will not be applicable to you.

These new tax rates apply to any dividend income in excess of the £5000:

• 7.5% (basic rate)
• 32.5% (higher rate)
• 38.1% (additional rate)

The government hopes that this new system will continue to provide a steady stream of money to the national treasury whilst also raising an approximate amount of 2.54 Billion during 2016/17.

Tips for making the most out of these new changes?

If you’re married or in a civil partnership, we would suggest that you spread your taxable portfolios between the both of you to make the most of the individual £5000 dividend allowance that the April changes have granted. Furthermore, try and make full use of basic rate tax bands so have taxable dividends paid in the name of the spouse that has the lowest tax rates.

If you happen to be paid by your company and are paying yourself with dividends you will need to take into account, your business costs and other potential tax reliefs when making a decision on whether to change how you draw an income. In light of this, you may want to consider getting an accountant as the process of calculating the amount of tax you need to be paying is a complex process.

We would also suggest that you reduce taxable income from other sources and move them to a more convenient date to avoid paying unnecessary tax. For example, deferring withdrawals from a dropdown pension until a new tax year would be advised. Income tax and dividend tax are both linked so by reducing your taxable income you also reduce the amount of dividend tax that you have to pay.

To find out more about the latest dividend changes and ways in which we can advise on mitigating tax, get in touch.

You can call 01623 490 120 or email This email address is being protected from spambots. You need JavaScript enabled to view it..