The Dividend Tax Credit has been replaced by a new tax-free Dividend Allowance and dividends paid by the Company on or after 6 April 2016 will not carry a UK tax credit.
A Dividend Allowance has been introduced whereby there will be no UK tax due on the first £5,000 of dividends received. Dividends above this level will be subject to tax at the prevailing dividend tax rate depending on your marginal tax bracket.
Although the first £5,000 of dividend income is not subject to UK income tax, it will not reduce the total income for tax purposes. Dividends within the Dividend Allowance will still count towards basic or higher rate bands, and may therefore affect the rate of tax paid on dividends received in excess of the £5,000 allowance. For instance, if an individual has £2,000 of the basic rate band remaining after earning non dividend income, and receives £6,000 of dividend income, they will be subject to the following scenario. The Dividend Allowance will cover the first £2,000 of dividends which fall into the remaining basic rate band, leaving the remaining £3,000 of the allowance to use in the higher rate band. The first £5,000 dividend income is therefore covered by the allowance and is not subject to tax. The remaining £1,000 of dividends will be taxed at the higher dividend tax rate as this income will fall into the higher marginal tax bracket.
How you pay any tax arising on the dividend income depends on the amount of dividend income you receive in the tax year. If less than £5,000 you don’t need to do anything or pay any tax. If between £5,000 and £10,000, you can pay what you owe by either contacting the HMRC helpline and asking HMRC to change your tax code whereby the tax will be taken from your wages or pension, or by filling in the ‘Dividends’ section of your tax return, if you complete one. If you receive dividends over £10,000 you will need to fill in the ‘Dividends’ section of your self assessment tax return.