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 £1,000) and any unused Personal Allowance (currently £12,570) combined will be taxed at varying rates (see table below). Individuals who receive dividends of more than £1,001 may need to complete self-assessment tax returns.

Please note: the Personal Allowance on £12,570* 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.

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.

*The Personal Allowance is smaller if your income is over £100,000. Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance.