By Lynne Gowers on 29th July 2016

New dividend tax – passing the basic rate threshold

dividend tax

Back in April, we talked at length about the government’s new rules on dividend tax which came in to force at the start of the current tax year.
Now that we are 3 months in, we have been getting some calls from clients as they start to see the first effects of the new rules and pass into the threshold where they owe some personal tax on the dividends they take.

We thought this would be a timely opportunity for a quick refresher on the rules as well as how the Boox App estimates and communicates your personal liability.

How are dividends taxed now?

The old system of tax credits was abolished and all dividends declared on or after 6th April 2016 are subject to tax under the new system.
After your personal tax allowance has been taken into account (£11,000 for the 2016/17 tax year if you are entitled to the entire amount), you can receive £5,000 of dividend income with no tax liability.

To work out what your dividend and tax obligations are for the current tax year, use our handy Dividend Tax Calculator

Therefore, if your entire income for the year is £16,000 or less, you will pay no dividend tax at all.
However once your dividend income reaches £5,000 per year, the following rates apply:

  • 7.5% (basic rate)
  • 32.5% (higher rate)
  • 38.1% (additional rate)

It is important to note that the £5,000 “dividend allowance” is actually a zero rate tax band just for dividend income, and it forms part of the existing tax band(s) within which an individual’s dividends fall. It is not provided in addition to the existing tax bands.

A quick example – £11k salary, £50k dividends

  • £11,000 salary takes up your entire personal allowance
  • First £5000 of dividends takes up the dividend allowance
  • Next £27,000 of dividends are taxed at 7.5% (basic rate) = £2,025
  • Remaining £18,000 of dividends are taxed at 32.5 (higher rate) = £5,850
  • Total dividend tax liability = £7,875

Alerts from the Boox App

As soon as you (or one of your shareholders) withdraws dividends that exceed the tax free allowance, you will receive a “word of warning” in your pay breakdown.

How this notification looks is shown below:

dividend tax

We will also notify you by email. These alerts give you the opportunity to start setting aside funds from your personal account to cover this liability. Don’t forget that dividend tax is a personal liability so funds cannot be set aside from the business.
If and when you exceed the higher or additional rate thresholds, we will communicate this to you in the same way.

If you have received this “word of warning” in your pay breakdown and have any questions, get in touch with your Boox accountant.

Lynne Gowers Written by Lynne Gowers

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