Understanding the Dividend Allowance

The 10% tax credit on dividends was abolished on 6th April 2016 and, in its place, a new tax-free Dividend Allowance was introduced for everyone.

Any dividends received in excess of the Dividend Allowance (currently £2,000) and any unused Personal Allowance (currently £11,850) combined will be taxed at varying rates (see table below). Individuals who receive dividends of more than £2,001 may need to complete self-assessment tax returns.

Tax band* Dividend Allowance Personal Allowance Any dividends received in excess of these amounts will be taxed at:
Basic rate taxpayers £2,000 £11,850 7.5%
Higher rate taxpayers £2,000 £11,850 32.5%
Additional taxpayers £2,000 £11,850 38.1%

Please note: the Personal Allowance on £11,850 should not be confused with the Personal Savings Allowance.

What does this mean for Chelsea's clients?

  • The changes apply to all equity funds that pay a dividend distribution, whether you are invested in income or accumulation units.
  • Instead of being paid net of 10% tax, these dividends will be paid gross of tax after 6th April 2016.
  • The potential tax liability therefore transfers to the client.
  • The amount of the dividend will need to be entered on tax returns as a gross dividend with no attached credit.

Example 1

  • “I receive less than £2,000 per year in dividends.”
  • Answer: No tax on your dividend income as it is within the Dividend Allowance.

Example 2

  • “I receive dividends of £6,000 from equities in an ISA.”
  • Answer: No tax is due on dividend income within an ISA.

Example 3

  • “I have £12,850 in dividend income from investments outside an ISA”
  • Answer: There is no tax to pay. The first £11,850 is covered by the personal allowance (if unused by things such as workplace provided-private health insurance) and the remaining £2,000 by the dividend allowance.

Example 4

  • “I am a basic rate tax payer and have non-dividend income of £1,500, and dividend income of £12,000 from equities held outside of an ISA.”
  • Answer: You must complete a self-assessment tax return.

All a bit complicated?

Remember that an ISA wrapper negates the need for any of these considerations: 

  • ISAs remain completely tax free.
  • Less tax planning and administration is required if you invest inside an ISA

Please note that the amount of dividend income paid in an ISA will not increase as a result of the tax credit being abolished. The 10% credit was entirely notional and the changes simply mean that the tax credit will no longer be reported.

Read more about the benefits of the ISA.