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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.

2017-18 Dividend Tax Calculator

The Dividend Tax Calculator will help you calculate your liability of total personal tax that will depend on your annual salary and dividends you get during the 2017/18 financial year.

You will need to enter the relevant fields in the relevant boxes of the calculator attached below to help the calculator help you calculate the tax that you will have to pay for the financial year 2017-18.

Dividend Tax Calculator






* This calculator is only for reference purposes. For accurate and detailed report, please consult with an accountant. *

Points to make notes and assumptions

  • The tax calculator is made by accountants. Though it is properly tested for the purpose, you should take the outputs as a guide.
  • To delete the replace the dividend amounts and current salary click on the cross icons.
  • To calculate your tax liabilities and dividends for the previous year, use the dividend tax calculator of 2016-17.
  • The personal allowance is £11,500 for the 2017/18 financial year. No tax is payable on income up to £11,500 – tax code is 1150L. It was £11,000 last year.
  • If your earning is over £100,000 during the financial year, your personal allowance for every £2 you make above this limit goes downwards by £1. Therefore, the personal allowance is removed entirely if the total earning is £123,000 or above.
  • On your first £5,000 of dividend income, there is a dividend allowance – a nil rate band. But, to calculate your overall tax liability, this allowance sits within your current tax slabs. It is expected from April 2018, this allowance will be lessened to a nominal amount of £2,000.
  • For the year 2017/18, the existing rates of dividend tax are 7.5% (which is a basic rate), 32.5% (is a higher rate), and 38.1% (is an additional rate).
  • While working out on your total income tax liability, you will find many possible variables. The calculator is simple keeping in view there is no other incomes of the taxpayer during the financial year.
  • Even the Employment Allowance is removed from the calculations. Your company can reclaim Employers’ NICs up to a value of £3,000 in the current financial year, if only it is eligible.
  • Always take advice of a qualified taxation expert or accountant if you need any professional help or have any doubts in the calculation process. It is always safer and more advisable, knowing it can save much of your time at a reasonable fee.
Tax band
Tax rate on dividends in excess of £5,000
Basic rate
7.5% on dividend income
Higher rate
32.5% on dividend income
Additional rate
38.1% on dividend income

Dividend Tax Calculator

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.

Dividend Allowance cut for April 2018

How much will the Dividend Allowance cut cost you? From April 2018, it is expected to be reduced to £2,000 from £5,000.

Practically what does it means, and what will be its cost on you?

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

Dividends cannot be considered as business cost while calculating the Corporation Tax. Moreover, there are no certain rules which describe how often a business or organization should distribute the dividends.

Our experts at DNS accountants recommend that processing dividend payments annually will help the businesses analyse its profits and take the right action accordingly. Important thing to consider is that all dividend payments have to 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 current dividend taxation system, there are fixed tax rates applicable for tax year 2016/17 onwards. You are required to submit information about the income received as dividends to HM Revenue office.

For 2016/17 tax year onwards, dividend income is taxed as follows:

Tax band
Income for 2016/17
Tax rate
Basic
£0 – £32,000
7.5%
Higher
£32,001 – £150,000
32.5%
Additional
£150,000 +
38.1%

A dividend allowance of £5,000 is also provided, which means that the initial £5,000 of dividends is not taxable. However, dividend allowance does not decrease the total income upon which tax has to be paid. Dividends are taxed after all other income sources have been taxed, e.g. salary and other pertinent earnings (investments or savings). As a result of which, dividends fall into one of the tax bands stated above, after other income sources and personal allowance have been added together.

The Chancellor targets dividends again, but why?

In the Budget Speech of Spring 2017, the Chancellor said: “People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.”

He made it very clear in his speech, that people irrespective of them being employees, self-employed, or director/shareholders, they should pay largely the same amount of tax.

He used this as justification, and announced a hike in the levels of Class 4 National Insurance paid by the self-employed (however, a u-turn taken shortly later) and a rise in the dividends taxation ways in the limited company.

On what the Chancellor has said, many experts and commentators have said, the Chancellor tried to compare non-employee taxation with employee taxation in his calculations, without taking into his views the huge sum of benefits, remunerations, bonus advantages employees get, something that is not available to non-employees for free.

Will this dividend allowance cut continue?

As a result of the General Election, the dividend allowance cut was dropped from the Finance Bill 2017. However, it will continue as expected from April 2018. The bill was re-introduced into a second Finance Bill (published on 8th September). On 16th November 2017, the Bill received Royal Assent.

See Part 1, Section 8 of Finance (No. 2) Act 2017 for the definite reference to the cut to £2,000 from £5,000, previously.

Dividend Allowance

It was in April 2016, when the dividend allowance was implemented, as an essential change in the process dividends are taxed.

Before April 2016, dividends were paid to shareholders net, and multiplied by 10/9 to generate the gross dividend upon which dividend tax was imposed, under the tax credit system.

Dividends are liable to new tax rates (basic – 7.5%, higher – 32.5% and additional – 38.1%), ever since the new rules came into existence in April 2016. This has made a noticeable extra tax burden on owners of limited companies.

A tax-free ‘dividend allowance’ applied to the first £5,000 of dividend income is seen as only single concession created through dividend allowance. Means the first £5,000 of dividends are not liable to taxes, but this sum continues to be within the significant tax bracket for overall purpose of taxation.

The dividend allowance reduction that will cost you

The dividend allowance will be reduced to £2,000 from £5,000 from April 2018. It will depend on the tax bracket the first £5,000 falls into to prove how the reduction in dividend allowance will affects you.

If it falls into basic rate bracket, you will be £225 downwards (7.5% basic rate dividend tax x £3,000). It will cost additional-rate taxpayers £1,143 and higher-rate taxpayers £975.

However, the total tax affected will differ from the above figures if the first £5,000 of dividends falls between two tax brackets.

The final tax affected could be £225, if you receive a very less salary, and do not have any other significant additional income during the financial year. This is with the assumption that before the current implementation date, the Chancellor will not be curious to interfere further with dividend taxation.

The dividend allowance process in practice

Have a look at the example of how the dividend allowance affect an owner of a limited company who is drawing down a £11,000 salary and £50,000 dividends during the 2017/18 financial year. Feed your own salary/dividend combination into our dividend tax calculator.

  • The £11,500 salary is the entire 2017/18 personal allowance.
  • The first £5,000 of dividends is incorporated within the dividend allowance.
  • The next £28,500 of dividends are liable to tax at 7.5% (basic rate) = £2,137.50.
  • The remaining £16,500 dividends are liable to tax at 32.5% (higher rate) = £5,362.50.
  • £7,500 is the total dividend tax liability.

More Information

Make sure you are updated with the latest changes in the taxation, reliefs and allowances to avoid any last minute glitches. There is an expectation as per the Budget documentation that the dividend allowance deduction will to increase an extra £800m to £900m per year for the Treasury.

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