HMRC have published a Fact Sheet on the new system of taxation of dividends; really useful reading for every director of a one person limited company.
The fact sheet can be found at:
The examples quoted are very interesting, especially example six …
“I have a non-dividend income of £40, 000, and receive dividends of £9,000 outside of an ISA”
How income is taxed
From 2016 / 2017 the personal allowance will be £11,000. Taxation will be paid at the basic rate of 20% up to £32,000 of income after deducting the personal allowance i.e. the higher 40% rate of taxation kicks in at total income in excess of £43,000.
The first £5,000 of dividend income will not attract taxation.
How the tax free dividend allowance could have worked
In the example the total income subject to taxation could be:
£40,000 less the personal allowance of £11,000 = £29,000
£9,000 less the dividend allowance of £5,000 = £4,000
Total income = £33,000 which is £1,000 of income over the higher rate threshold
So £1,000 of the £4,000 taxable divided income would attract dividend tax at 32.5% and the remaining £3,000 would be taxed at 7.5% = taxation of dividend of £550.
THIS IS INCORRECT
How the tax free dividend allowance actually works
According to the HMRC Fact Sheet the dividend tax is calculated as follows:
[Quoted directly from the fact sheet]
“Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate. This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax. The remaining £4,000 of dividends are all taxed at higher rate (32.5%).”
So the taxation of the dividend is actually £1,300; more than double how it could have been calculated.
The devil is most certainly in the detail.