What is the Dividend Allowance?
The dividend allowance exists in addition to an individual’s personal allowance and savings allowances. It means that dividend income within the dividend allowance is tax-free. There is no longer the 10% Tax Credit that existed prior to 2016.
However, 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.
Therefore, the dividend allowance only delivers tax-relief at the lowest tax rate an individual is paying on their dividends; rather than the highest.
Tax rates on dividends
The rates of tax on dividends above the dividend allowance are currently:
- 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 from April 2018
From April 2018 the dividend allowance will only be £2,000
The change is designed to target shareholder-directors in business who take dividends on top of a salary, as well as savers with investments in stocks and shares typically worth over £50,000 outside Individual Savings Accounts (ISAs).
| Clients with £5,000 of dividend income | |
| Tax Band | Expected loss in 2018/19 – £2,000 allowance |
| Basic | £225 |
| Higher | £975 |
| Additional | £1,143 |
Planning opportunities
Whether you save, or are a business owner, you will naturally want to minimise the impact of the reduction in the dividend allowance.
Maximise the dividend allowance
Every individual is entitled to their own dividend allowance so you might want to consider transferring some shares to your spouse or civil partner, thus spreading your investment to ensure that you utilise each person’s individual allowance.
Disclaimer:- The information contained herein is given by way of general guidance only and no action should be taken solely on the basis of the information contained herein. The Avanti Group (UK) Ltd will be pleased to provide further guidance on the issues, and how they might affect you. No liability is accepted by the firm for any action taken without seeking appropriate professional advice