The Rules The rules for taxing dividends changed radically from 6 April 2016 with the removal of the 10% notional tax credit and the introduction of new rates of tax on dividends. You might then be part of the many taxpayers who will have to pay more tax on those dividends on 31 January 2018.
From 6 April 2016 Up until 5 April 2016, the 10% dividend credit meant that as a basic rate taxpayer, you paid no tax at all on dividend income as the 10% tax on dividends was covered by the 10% tax credit. For example, where a basic rate taxpayer received £9,000 dividends, this would be treated as £10,000 gross income but the 10% tax of £1,000 would be covered by the £1,000 tax credit. From 6 April 2016 the same £9,000 dividend would now be taxed at 7.5% once the £5,000 dividend allowance has been used making £300 tax due on 31 January.
Higher Rate Taxpayer If you are a higher rate taxpayer receiving dividends, the loss of the 10% tax credit means that the full 32.5% rate applies to dividends in excess of the £5,000 allowance. Thus, if, as a higher rate taxpayer, you received £30,000 of dividends, £25,000 of those dividends would be taxed at 32.5% meaning £8,125 due on 31 January 2018. Last year the tax on the same dividends would have been £7,500 after deducting tax credits.
Lotuswise Chartered Accountants and Business Consultants can help you figure out tax, therefore if you can let us have all of your tax documents, we can let you know how much tax you need to pay next January so that you can set aside sufficient funds, so please contact us as soon as possible.