Dividend Tax: Changes from 2016-17

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Changes in Dividend tax with effect from 06.04.2016 means, increase in tax on dividend income.
 
What are the changes then?
The notional 10% tax credit on dividends will be abolished.
What does it mean?
It means, the Dividend income will not be grossed up while preparing the SA Tax return for the individual receiving the dividend.

The dividend to be added to an individual’s tax return will be the same as the one declared by the company.

Dividend tax allowance is being introduced from 2016-17
How much is it?

£5000

Does it depend on my income?

No, an allowance up to £5000 will be given irrespective of your income.

What does it mean?

Any dividend up to £5000 will be tax free

Any dividend above £5000 (i.e. Dividend tax allowance) will be tax at
Basic Rate – 7.5%

Higher Rate – 32.5%

Additional Rate – 38.1%

Individuals who are basic rate taxpayers and receive dividends between £5,001 and £10,000 will now have to complete self assessment returns.
 
Will this apply to Dividend received only from UK companies?
No. For UK taxpayer, any dividends received either from UK or offshore company will be applicable to dividend tax.
How will the tax be calculated?
It depends on the overall income of an individual since, the dividends are still considered as the top slice of an individual’s income.
Dividends Less than £5000
Pay no dividend tax AT ALL. Even if you are a higher rate tax payer, your dividend up to £5000 will not be taxed.
If your total income is less than your personal allowance, your dividend allowance will be effectively unused.
Dividends More than £5000
There will be a tax on the dividend above £5000. The tax-rate of the dividend will depend upon tax payer’s total income.
For tax year 2016-17,
the personal allowance is £11,000
the basic rate (BR) threshold is £32,000
the higher rate (HR) threshold is £43,000
Following examples will show the calculation of dividend tax under various circumstances.
Scenario 1: Total income less than £11,000
Non-Dividend Income – £3000 & Dividend income is £7,000.
Here, although the Dividend income is more than £5,000 there will not be any tax payable because the taxpayer will be able to claim all the income under personal allowance.
Scenario 2: Total income is more than £11,000 but less than £43,000
Case Study 1
Non-Dividend Income – £20,000
Dividend Income – £7,000
Dividend tax will be calculated as under
Total Dividend – £7,000
Less: Dividend tax allowance – £5,000
Balance – £2,000
Apply rate of 7.5% = £150.
Case Study 2 (Use of some personal allowance against Dividend Income)
Non – Dividend Income – £8,000
Dividend Income – £10,000
Here, £3,000 (£11,000 less £8,000) of personal allowance can be used against dividend income.
Dividend tax will be calculated as under.
Total Dividend – £10,000
Less: Dividend Tax Allowance – £5,000
Less: Balance of Personal Allowance – £3,000 (£11,000 minus £8,000)
Balance – £2,000
Apply rate of 7.5% = £150
If non-dividend income for 2016-17 is less than £11,000 then, unused personal allowance can be offset against the dividend income which will be in addition to the £5000 of dividend tax allowance available.
Scenario 3: Total Income is more than £43,000
Case Study 1
Non-dividend income – £45,000
Dividend income – £5,000
Dividend tax will be zero since full dividend of £5,000 will be covered by dividend tax allowance.
Case Study 2
Non-Dividend income – £45,000
Dividend income – £7,000
Dividend tax will be calculated as under.
Total dividend – £7,000
Less: Dividend tax allowance – £5,000
Balance – £2,000
Apply rate of 32.5% = £650
Case Study 3 (Use of personal allowance + dividend tax allowance + basic rate + higher rate)
Non-Dividend income – £8,000
Dividend income – £50,000
Dividend tax will be calculated as under.
Total Dividend – £50,000
Less: Balance of personal allowance – £3,000 (£11,000 less £8,000)
Less: Dividend tax allowance – £5,000
Balance £42,000 of which £27,000 will be taxed at 7.5% and £15,000 will be taxed at 32.5%
£27,000 x 7.5% = £2,025
£15,000 x 32.5% = £4,875
Total dividend tax = £6,900
This is how £27,00 has been calculated.
Higher rate bracket – £43,000
Less: Non-Diviend income – £8,000
Less: Dividend covered by personal allowance – £3,000
Less: Dividend covered by dividend tax allowance – £5,000
Balance – £27,000 – This is well under basic rate limit so, this will be taxed at 7.5%
This is how £15,000 has been calculated
Total dividend – £50,000
Less: Dividend covered by personal allowance – £3,000
Less: Dividend covered by dividend tax allowance – £5,000
Less: Dividend covered by basic rate tax – £27,000

Balance – £15,000