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Dividend taxation – new rules are afoot

8th March 2016

Bob Dylan once sang (and probably still does) “The Times They Are a-Changin’”, and that’s certainly the case when it comes to how dividend income is taxed. From 6th April 2016, the old and, quite frankly, rather confusing system is being put out to pasture, and a set of new, simpler rules are being introduced.

Under the new rules, everyone is entitled to a £5,000 tax free dividend allowance. This means that the first £5,000 of dividends that you receive will not be taxed. It is important to note that this £5,000 allowance does count towards your total taxable income. This means that if your gross income is £30,000, and you then receive a dividend worth £5,000, you will not pay any tax on that dividend, but it will increase your taxable income to £35,000 and thus bring you closer to the higher rate tax band.

Once you have used up your £5,000 allowance, any dividend income above this will be taxed at either 7.5% if it falls within the basic rate band, 32.5% if it falls within the higher rate tax band, or 38.1% if it falls within the additional rate band.

These new rules mean that it may be more tax efficient to withdraw money from a limited company before the 6th April. If you would like to discuss your situation in more detail then we would be happy to help.