In April 2016, a tax-free dividend allowance replaced the dividend tax credit. This meant that tax doesn’t have to be paid on the first £5,000 of dividend income a person receives. The headline rates of dividend tax also were changed.
Tax charged on dividend received over £5,000 is currently (02/06/2017):
· 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 new, simpler system means that only those with significant dividend income are subject to higher tax.
The Dividend Allowance does not reduce the total income for tax purposes, and dividends within the set allowance are still counted towards the appropriate basic or higher rate tax bands.
On 6th April 2018 the Dividend allowance will be reduced to £2,000.