From April 2016 the dividend tax credit was replaced by a new tax-free dividend allowance. The dividend allowance means that you won't have to pay tax on the first £2,000 of your dividend income, no matter what non-dividend income you have. The allowance is available to anyone who has dividend income. Headline rates of dividend tax are also changing.
You'll pay tax on any dividends you receive over £2,000 at the following rates:
- 8.5% on dividend income within the basic rate band.
- 33.75% on dividend income within the higher rate band.
- 39.35% on dividend income within the additional rate band.
The dividend allowance will not reduce your total income for tax purposes. However, it will mean that you don't have any tax to pay on the first £2,000 of dividend income you receive. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £2,000 allowance.
Where appropriate to the calculations, the examples use the limits that will apply from April 2022:
- Personal allowance: £12,570.
- Basic rate limit: £50,270.
- Higher rate: £150,000.
- Aditional rate: over £150,000.
To calculate your tax band, you will need to add your total dividend income to your other income. You may pay tax at more than one rate.
Example
You get £3,000 in dividends and earn £29,570 in wages in the 2022/23 tax year. This gives you a total income of £32,570. You have a personal allowance of £12,570 which you can take off your total income leaving a taxable income of £20,000.
Therefore the tax you would pay is:
- 20% tax on £17,000 of wages.
- No tax on £2,000 of dividends due to the dividend allowance.
- 8.75% tax on the remaining £1,000 of dividends.