You may have already heard but here it is again – As of next tax year (2018/19), your tax free dividend allowance is reducing from £5,000 down to £2,000. This means you will pay tax on an additional £3,000 of your dividends, the tax rate on which will vary depending on your overall income levels.
Let’s look at two scenarios below to demonstrate how this works.
Scenario 1: 2017/18 tax year
You receive a salary of £11,000 and dividends of £5,000. What’s the tax due on these?
Personal Allowance: £11,500 (salary of £11,000 goes into this) – no tax due, but £500 of the allowance is wasted/unused
Dividend Allowance: £5,000 (full dividend received goes into this) – no tax due
Scenario 2: 2018/19 tax year (looking ahead, assuming all other rates stay the same except dividend allowance)
You receive a salary of £11,500 and dividends of £40,000. What’s the tax due on these?
Personal Allowance: £11,500 (salary of £11,500 goes into this) – zero tax
Dividend Allowance: Dividend allowance of £2,000 at nil rate (£40,000 less £2,000, £38,000 remaining) – zero tax
Dividend Allowance: Basic rate band for £31,500 at 7.5% basic rate (£38,000 less £31,500, £6,500 remaining) – £2,362.50 tax
Dividend Allowance: Higher rate band for remaining £6,500 at 32.5% higher rate – £2,112.50 tax
Total tax projected £4,475
Important Note: The £2,000 “dividend allowance” is a nil rate band for dividend income only, however, it forms part of the existing tax bands within which an individual’s dividends fall. Do not confuse this with being a separate free allowance that forms its own zero tax band.
Be Tax Efficient
With the above change due in mind, it is important to plan ahead to ensure you are as tax efficient as possible. Take into account your likely level of income for the next year, your expenses, salaries and deductions as well as their timings to work out the best salary and dividend split for you. We’re experts at this so if you need help with any of the financial projections, contact us right away.
Disclaimer – the above does not constitute advice nor must it be relied upon. You must seek full and proper advice that is applicable to your individual circumstances and correct at the time of your enquiry. Rules are always subject to change so you must never assume the information stated is the latest/most up to date.