April 26th, 2018
Reduction in Tax-Free Dividend Allowance from April 2018
With effect from 6 April 2018, the dividend allowance will decrease from £5,000 per tax year to £2,000 per tax year.
This means that dividends received by an individual in excess of £2,000 from the start of the 2018-19 tax year will be subject to either 7.5% tax (for basic rate taxpayers), 32.5% tax (for higher rate taxpayers), or 38.1% tax (for additional rate taxpayers).
What will this mean for you?
• £225 additional tax for basic rate taxpayers (£3,000 @ 7.5%)
• £975 additional tax for higher rate taxpayers (£3,000 @ 32.5%)
• £1,143 additional tax for additional rate taxpayers (£3,000 @ 38.1%)
For example, a limited company owner with a salary of £11,850 and dividends of £30,000 (and no other income) in 2018-19 would be taxed as follows:
Salary: covered by personal allowance, so no tax due = £0
Dividends: £2,000 taxable at 0% = £0
£28,000 taxable at 7.5% = £2,100
Total tax due: £2,100
As the liability is over £1,000 and less than 80% tax has been collected at source, payments on account would also be due, resulting in a total of £3,150 due by 31 January 2020, followed by £1,050 due by 31 July 2020.
In another example, a limited company owner with a salary of £11,850 and dividends of £50,000 (and no other income) in 2018-19 would be taxed as follows:
Salary: covered by personal allowance, so no tax due = £0
Dividends: £2,000 taxable at 0% = £0
£32,500 taxable at 7.5% = £2,437.50
£15,500 taxable at 32.5% = £5,037.50
Total tax due: £7,475
As the liability is over £1,000 and less than 80% tax has been collected at source, payments on account would also be due, resulting in a total of £11,212.50 due by 31 January 2020, followed by £3,737.50 due by 31 July 2020.
It is worth noting that although £2,000 is taxable at 0%, this uses up £2,000 of the basic rate band.
In a final example, someone with only dividend income (£30,000 in this case) in 2018-19 would be taxed as follows:
Dividends: £11,850 covered by personal allowance, so no tax due = £0
£2,000 taxable at 0% = £0
£16,150 taxable at 7.5% = £1,211.25
Total tax due: £1,211.25
As the liability is over £1,000 and less than 80% tax has been collected at source, payments on account would also be due, resulting in a total of £1,816.88 due by 31 January 2020, followed by £605.62 due by 31 July 2020.
