How is dividend income taxed?

The taxation of dividends changed on 6 April 2016, the Dividend Tax Credit was replaced by a new Dividend Allowance of £5,000 (to be reduced to £2,000 in April 2018).

Dividend income that exceeds the Dividend Allowance threshold, will be taxed at the following rates:

  • 7.5% if dividend income falls within the standard rate band
  • 32.5% if dividend income falls within the higher rate band
  • 38.1% if dividend income falls within the additional band

Impact on the company owner: 

The new legislation has reduced the tax advantages of a company owner taking a small salary and the rest of income as dividends.  Continuing to use this method of profit extraction will mean that the individual will continue to avoid paying national insurance on their income but will be facing higher tax charges on dividend income.

Basic and higher rate taxpayers receiving dividend income in excess of £5000 will be paying more tax. Those who take large dividends will see increases in their tax liability, in line with the following examples:

  • A basic rate tax payer receiving dividend income of £28,000 will see an increase in liability of approximately £1,725.
  • A higher rate tax payer receiving income of £90,000 will see an increase of approximately £5,125.

However changing the salary/dividend split and taking a larger salary is not necessarily the best solution.

What action can be taken?

Each situation is different and there is no single solution to the issue. If you are concerned about your tax liability for the year ended 5 April 2017, please contact us.

On a case by case basis, we can identify how much higher your tax bill will be and whether you should restructure your remuneration strategy.