If you noticed your tax return being a little higher this year, here may be the reason:
Many company owners pay themselves in the form of dividends, rather than a salary. However, in 2016 a new regulation was introduced called the ‘Dividend Tax Allowance’ whereby only the first £5,000 of your dividend payment will be tax free.
This Dividend Tax Allowance will take effect for your dividend income for the tax year 2016 / 2017, which will have been filled for the self-assessment due in January 2018.
This means that, before the introduction of the dividend tax, you would have been a standard rate tax payer with no extra tax due on dividends, whereas, you will now need to pay extra tax.
Please note, that in the 2017 Budget it was announced that the tax-free allowance is set to cut by more than half, taking the tax-free allowance to £2,000. This will come into effect from April 2018.
After the first £5,000 of tax-free allowance, dividends are taxed at the following rates:
Dividends falling within the…Taxed at…
basic rate tax7.5%
higher rate tax32.5%
additional rate of tax38.1%
However, in regard to the additional rate of tax, remember that for income over £100, 000 your personal allowance starts to get restricted.