Dividend nil-rate

An outline of the changes to the rules regarding dividends.

Lawrence Grant can help taxpayers in the Harrow area with queries you have regarding dividends – here is an overview of the new Dividend Allowance scheme...

A person does not have to pay tax on the first £2,000 of dividend income, regardless of the level of non-dividend income. Tax is charged on dividends received over £2,000 at the following rates:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band.

The Dividend Allowance does not reduce total income for tax purposes, and dividends within the allowance still count towards the appropriate basic or higher rate bands. They may therefore affect the rate of tax payable on dividends received in excess of the £2,000 allowance.

Example 1

This is a quite straightforward example, based on 2019-20 tax rates and allowances, showing the taxable amounts after allocating the relevant allowances to the two types of income.

  Non-Dividend Income
£
Dividend Income
£
  18,000 22,000

Dividend Allowance

- 2,000
Personal Allowance 12,500 -
Taxable at basic rate 5,500 (20%)

20,000 (7.5%)

Example 2

This example is more complicated, in that it splits the dividend allowance into two - £1,500 to use up the balance of the basic rate band and £500 to 'eat into' the higher rate band.

  Non-Dividend Income
£
Dividend Income
£
  48,500 9,000
Personal Allowance 12,500 -
Dividend Allowance to basic rate limit - 1,500
Dividend Allowance higher rate band - 500
Taxable at basic rate 36,000 (20%) -
Taxable at higher rate - 7,000 (32.5%)

Lawrence Grant can advise businesses in the Harrow area on a range of tax issues relating to dividends. Please contact us for more information.

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