DIVIDEND TAX CALCULATOR
Individuals holding shares of a company may receive dividends. As per the new rule, starting 6 April 2016, the Dividend tax credit was replaced with a new tax-free dividend allowance. Under this allowance, individuals won’t pay tax on the initial £5,000 of dividend income, irrespective of the non-dividend income. The allowance is accessible to anyone who has dividend income and is applicable from 6 April to 5 April of the following year.
Any Dividends received which utilize personal allowance are non taxable. So if your personal income is less than 11000 then any dividend received upto 11000 allowance is non taxable. Remember 5000 Limit applies for dividend above personal allowance. So if you do not have any other income Dividends upto 16000 will be tax free. Let’s take a few examples to better understand the new tax-free dividend allowance.
Example 1: If an individual receives less than £5,000 per year in dividends – From April 2016, they won’t have to pay tax on dividend income as it is within the new Dividend Allowance
Example 2: If an individual has a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an Individual Savings Account (ISA) – With a Personal Allowance of £11,000, dividend worth £4,500 are under the threshold for tax. Further, £5,000 falls within the dividend allowance; hence, tax payable is Basic Rate (7.5%) on £2,500
Example 3: If an individual has a non-dividend income of £20,000, and receives dividend of £6,000 outside of an ISA – Tax is not applicable on the initial £5,000 (of dividend) due to dividend allowance, but will have to pay tax on £1,000 of dividends at 7.5%
Example 4: If an individual has a non-dividend income of £18,000, and receives dividend of £22,000 outside of an ISA – For the £18,000 non-dividend income: £11,000 is covered by the Personal Allowance and the difference £7,000 is taxed at Basic Rate; For £22,000 dividend income: the Dividend Allowance covers the initial £5,000 and the difference £17,000 of dividends is taxed at the Basic Rate (7.5%) *The above examples used the limits that are applicable post April 2016: Personal Allowance: £11,000; Basic Rate Limit: £32,000; Higher Rate Threshold: £43,000
Dividends cannot be treated a business costs while computing the Corporation Tax. Also, there are no rules which determine how often a company should distribute dividends. However, we at DNS accountants suggest that processing dividend payments annually will help the company to analyse its profits and take the right call. The most essential thing to remember is that all dividend payments must be legal (i.e. there is satisfactory retained earnings in the company to cover the dividends), or else they will be classed as illegal and could result in HMRC penalties.
Dividends and limited company directors
Apart from the salary, majority of the limited company directors and shareholders withdraw most of their income in the form of dividends. Dividends are distributed by companies in order to return a percentage of company’s profit to their shareholders. A limited company structure is a more lucrative way for most business owners to work, as limited company directors are taxed in a different way as compared to their permanent (salaried) counterparts. Most limited company directors take a small salary, and withdraw the remainder of their company’s profits in the form of dividends.
Dividends are taxed at three different flat rates, depending on the income tax band. However, National Insurance Contributions (NICs) are not payable on dividend income, helping company directors save thousands each year as compared to traditional employees and sole traders.
Calculation of dividend tax
As per the new dividend taxation system, fixed tax rates apply for 2016/17 tax year onwards. Through a self assessment form HMRC must be informed about the income received as dividends. For 2016/17 tax year onwards, dividend income is taxed as follows:
A dividend allowance of £5,000 is also provided, which means that the initial £5,000 of dividends is not taxable. However, this allowance does not decrease the total income upon which tax needs to be paid. Dividends are taxed after all other income sources have been taxed, e.g. salary and other pertinent earnings (investments or savings). Consequently, dividends will fall into one of the tax bands states above, after other income sources and personal allowance have been added together.