Since 6th April 2016, a new dividend tax came into the effect in a bid for determining tax-minimising strategies and incentives for
more people to invest their bonus income instead. The estimated 10% Dividend
Tax Credit has been replaced by a 0% tax rate on the first £5,000 dividends
till 5 April 2018 (£2,000 for a year to 5th April 2019).
Likely, approximately 1 million directors and shareholders of the UK limited companies will remain unaffected or pay less on their dividend income. Although, the changes will have a significant impact on small business owners who pay basic tax rates and take a huge amount of their annual remuneration as dividends.
New dividend tax rates
Before the changes to dividend tax rules, the basic-rate taxpayers avoided paying the Income Tax and National Insurance Contributions on their whole bonus income, whilst of the higher tax rates and the additional rates, which the taxpayers had to pay 32.5% (effective rate of 25% after 10% tax credit) and 37.5% (30.56% after 10% tax credit), respectively, based on their bonus income and higher than the basic rate threshold.
Due to the new rules, the residents of the UK are now required to pay the below-mentioned tax rates on their annual dividend income more than £5,000 (£2,000 after 5th April 2018):
- Basic-rate payers: 7.5%
- Higher-rate taxpayers: 32.5%
- Additional-rate taxpayers: 38.1%
If you receive a total yearly income of £13,500, which is made up of £11,500 salary + £5,000 dividends:
- You are a basic-rate taxpayer. Neither you have to pay any dividend tax, nor will you pay any income tax on your salary because it is within your tax-free personal allowance.
- You need to pay 12% Class 1 National Insurance on your salary between £8,164 (NIC Primary Threshold for 2018-19) and £11,500.
- The company will be paying 13.8% Class 1 Employer's NI on your salary £8,164 (Secondary Threshold for the 2018-19 tax year) and £11,500.
If you receive a total annual income of £45,000. This consists of £11,500 salary + £33,500 dividends:
- You are a basic-rate taxpayer
- You will not have to pay any tax on the first £2,000 of your bonus income, also you do not have to pay any Income Tax on your salary
- You need to pay 12% class 1 NIC of your salary between £8,164 - £11,500
- The company is required to pay 13.8% Employer's NI on your salary between £8,164 - £11,500
- You will pay a 7.5% dividend tax on remaining £31,500 of your bonus income.
If you get a whole annual income of £55,000, which is made up of £11,500 salary + £43,500 dividends:
- You are a higher-rate taxpayer
- You do not have to pay 12% Class NIC on your between £8,164 to £11,500
- The business will pay 13.8% Employer's NI on the salary you get between £8164 - £11,500
- You need to pay a 7.5% dividend tax on £31,500 of the dividend amount you earned, and 32.5% dividend tax on the remaining £10,000 of dividend income.
Does personal allowance cover the dividend income?
How will these changes affect ISAs and Pensions?
If you receive dividends on shares held in an ISA, this income will remain tax-free for a long time under the new regime. It implies that you can save £20,000 of dividend income in an ISA during the 2018-19 tax year.
The rules for pensions also did not change. The dividend income that is received in a pension fund will remain tax-free whilst this amount remains in the pension. When this income is withdrawn, the tax will be imposed on the dividends in one with the pension withdrawal rules that are present at that time.