The current dividend tax credit system is a bit confusing and works as follows
You want to pay a dividend of £900. Divide £900 by 9, which gives you a dividend tax credit of £100. Pay £900 to the shareholder – but add the £100 tax credit and record a total of £1,000 on the dividend voucher. The dividend is then shown gross on the tax return and then the 10% tax credit is deducted rates of tax are then applied as noted below.
Dividend tax rates before April 2016
| Tax band | Effective dividend tax rate |
|---|---|
| Basic rate (20%) (and non-taxpayers) | 0% |
| Higher rate (40%) | 25% |
| Additional rate (45%) | 30.56% |
This will change from April 2016, see the table below
Dividend tax rates after April 2016
| Tax band | Effective dividend tax rate |
|---|---|
| Tax Free £5,000 | 0% |
| Basic Rate Tax Payers (20%) | 7.5% |
| Higher Rate Tax Payers (40%) | 32.5% |
| Â Additional Rate Tax Payers (45%) | Â 38.1% |
But be warned!
While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.
These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 2019‑20. The tax system will continue to encourage entrepreneurship and investment, including through lower rates of Corporation Tax. (HM Treasury Summer Budget 2015)
steve@bicknells.net
