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Changes to the taxation of dividends

Tax rules which came into effect on 6 April 2016 mean the dividend tax credit has been abolished and a new dividend allowance introduced, along with higher rates of income tax on dividends in excess of the allowance. Here’s a summary of the changes but you should bear in mind that tax rules may change again in the future. The effects of tax rules on you will depend on your individual circumstances. Barclays are not tax advisers and we do not provide tax advice. If you're unsure of your tax position, we recommend that you obtain independent tax advice, tailored to your particular circumstances.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • How dividends were taxed previously.
  • How the Dividend Allowance works.
  • What impact the changes will have on your dividend income.

How were dividends previously taxed?

Prior to April 6 2016, income from dividends was taxed at 10% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 37.5% for additional rate taxpayers. However, all UK dividends were paid with a notional 10% tax credit. This meant that basic rate taxpayers didn’t have any tax liability on dividends, while higher rate and additional rate tax payers paid effective rates of 25% and 30.56% respectively. This was done via their annual self-assessment tax return.

What’s changed?

Since April 6 2016, the 10% notional tax credit on dividends has been scrapped. All taxpayers have an annual tax-free dividend allowance of £2,000, down from £5,000 in the previous 2017-18 tax year. Only dividend income above this allowance is taxed at new, higher rates.

The dividend allowance is in addition to your personal allowance, which is the amount you can earn each tax year before you have to start paying tax. In 2018-19 the personal allowance is £11,850. This means that if you receive £13,000 in dividend income next tax year, the first £11,850 could be covered by the personal allowance and the remaining £1,150 by the dividend allowance, so no tax would be payable (assuming you receive no other income).

Dividend income in excess of the allowance will be treated as the top band of your income, in other words, after all other income and allowances, which means it will be taxable at your highest rate.
New dividend tax rates:

  • Basic rate tax band = 7.5% on dividend income
  • Higher rate tax band = 32.5% on dividend income
  • Additional rate band = 38.1% on dividend income

What impact do these changes have?

The changes mean that higher rates of tax apply on dividend income received above £5,000 a year, or £2,000 in the next tax year. There is no tax to pay on dividend income below that threshold.

The introduction of the dividend allowance means that investment ISAs may appear less appealing to those with dividend income below £2,000. However, it’s worth remembering that your dividend income may rise above this limit over time, and any profit you make when selling investments in your investment ISA is free of Capital Gains Tax (CGT). Profits on investments held outside of an ISA are potentially liable for CGT. However, each tax year individuals have a CGT allowance, currently £11,700, so if you sell a non-ISA investment you will only be taxed on any profit above that amount.

ISAs can therefore increase the opportunity for tax-free returns over the long term, provided that they remain in their present form. You can invest up to £20,000 in tax-efficient ISAs in the 2018-19 tax year. You can use your full £20,000 allowance in an investment ISA, or split however you want across a cash ISA, investment ISA, lifetime ISA (max £4,000), and an innovative finance ISA.1 If you don’t use your allowance one year, it will be lost for good.

As well as the dividend tax allowance, the Personal Savings Allowance, introduced in April 2016, changed the way savings income is taxed. For more information on these changes read our article: What is the personal savings allowance and what does it mean for you?

You should bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances. The investments that you make can fall in value as well as rise; you might get back less than you invest.

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