|On Wednesday 8th July 2015 George Osborne delivered a summer budget and one of the biggest changes announced was how dividends are taxed from April 2016, this is called the Dividend Allowance.
How will the new tax work?
From April 2016, the first £5,000 of dividend income in each tax year will be tax-free. Sums above that will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers. The new tax takes effect on April 6, 2016. No tax will be deducted at source; taxpayers must use self-assessment to pay any tax due.
How does this differ from before?
Under the current system, basic-rate taxpayers pay no tax on their dividend income, while higher-rate taxpayers pay an effective rate of 25% and additional-rate taxpayers pay 30.56%. So taxpayers in all bands pay less than they would on earned income. This is because dividends are paid out of company profits that have already suffered corporation tax.