Allowances and Tax Bands:
In 2017/18 the personal allowance will be £11,500 and the basic rate limit will be increased to £33,500. As a result,
the higher rate threshold will be £45,000.
Changes to Dividend Taxation
A new Dividend Allowance is to be introduced for 2016/17 onwards. The current system of taxing dividends,
complete with dividend tax credits, is abolished. The Dividend Allowance will be £5,000, and dividends in excess
of the allowance will be taxed at the following rates:
•
7.5% (dividend ordinary rate) on dividends within the basic rate band;
•
32.5% (dividend upper rate) on dividends within the higher rate band;
•
38.1% (dividend additional rate) on dividends above the higher rate limit.
Dividend income is generally treated as the highest part of an individual’s income for the sake of determining
into which rate band it falls. For 2015/16, the dividend ordinary, upper and additional rates are, respectively,
10%, 32.5% and 37.5%. However, a comparison between these and the 2016/17 rates is misleading due to the
effect of dividend tax credits in 2015/16. Taking the tax credits into account, the effective rates for 2015/16 are,
respectively, 0%, 25% and 30.55%.
The Dividend Allowance is not a deduction in arriving at total income or taxable income. Instead, the first £5,000
of dividend income will attract a zero rate of income tax.
There is no distinction between dividends from UK companies and those from overseas companies; all
dividends (and other company distributions treated as dividends) will potentially attract the Dividend Allowance.
Dividends within an ISA continue to be tax-free, and do not count towards the Allowance.