From April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance. The Dividend Allowance means that you won’t have to pay tax on the first £5,000 of your dividend income however, you will pay tax at a minimum rate of 7.5% on all dividend income over £5,000.
You’ll pay tax on any dividends you receive over £5,000 at the following rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
This will affect most one/two Shareholder companies where the Directors/Shareholders are paid a basic Director Salary of between £8,000 – £10,000 p/a and are then paid in dividends. Any dividends paid up to the higher rate threshold attracted no further tax charges in the past, however from April 2016 there will be a charge of 7.5% on all dividend income over £5,000.