At present there is a notional tax credit deducted from dividends paid which covers the basic rate tax liability.
In future this tax credit will no longer be paid, instead people will be entitled to a £5,000 tax-free dividend allowance but will then pay tax on amounts above this depending on their tax band:
Basic rate taxpayer – 7.5% tax liability on dividends above £5,000
Higher rate taxpayer – 32.5% tax liability on dividends above £5,000
Additional rate taxpayer – 38.1% tax liability on dividends above £5,000
With the removal of the notional tax credit, combined with the above tax rates, you could find that next year you have a significant increase in your tax liability despite your income staying the same. It will particularly affect those who have invested in shares for their retirement, and those who have smaller limited companies.
As with the interest changes, the new £5,000 allowance does not reduce your total income and is only deducted later. So you could find that you are into a higher tax band from the one you thought you would be.
