For dividends received before 6 April 2016 the dividend allowance (covered in our article How are dividends taxed?) does not apply. Instead such dividends were treated as paid net of a tax credit. This article provides an overview of how individuals were taxed on dividends received prior to 6 April 2016, with examples of the tax payable.
What was the tax credit and how did it work?
The dividend tax credit was an amount that needed to be added to UK dividends received before 6 April 2016. Like the dividend allowance the tax credit was to reduce the double taxation potentially payable on such income as companies pay dividends out of taxed profits.
The tax credit for the last seventeen years has been 10%. The amount of tax credit should be on the dividend voucher you should have received with the dividend payment from the company. You can work out the amount of the tax credit by dividing the amount received (called the “net dividend”) by 9. Add the net dividend to the tax credit (or multiply the net dividend by 10/9) to work out the “gross dividend” amount. This is the amount on which income tax was payable for the tax year 2015/16 and the starting point for whether there’s any further tax to pay.
Pay dividends the easy way
Inform Direct helps you calculate dividend and tax credit amounts for each shareholder. It creates the necessary dividend vouchers for you to send on to shareholders once you have paid them.
Start nowExample of the dividend tax credit
Pippa is paid an amount of £4,500 as a dividend. The associated tax credit is £500 (£4,500 divided by 9). The gross dividend (the amount on which income tax is payable) is £4,500 + £500 = £5,000. This could also be calculated directly as £4,500 multiplied by 10/9.
Despite having actually received only £4,500, Pippa is deemed to have received gross dividend income of £5,000 for tax purposes. Whether she has any tax to pay on top of the notional tax credit will depend on how much other income she receives in the tax year.
Additional tax payable for dividends received before 6 April 2016
The tax payable on your dividend income depends on the level of your total earnings. Dividend income is taxed after your non-savings income (such as salaries or pension income) and other income from savings such as bank accounts.
Dividend income received before 6 April 2016 (for dividends received after 5 April 2016 see our article How are dividends taxed?) that fell into the:
- basic rate band (taxable income of up to £31,785 for the 2015/16 tax year (2014/15: £31,865)) was taxed at 10%, although this was covered by the dividend tax credit.
- higher rate band (taxable income between £31,785 and £150,000 for the 2015/16 tax year (2014/15: £31,865 to £150,000)) was taxed at 32.5%. Part of this was covered by the dividend tax credit.
- additional rate band (taxable income in excess of £150,000) was taxed at 37.5%. Again, part of this was covered by the dividend tax credit.
These bands applied after taking into account your personal allowance. The following sections look at the amount of tax payable and how it is worked out for a basic rate, higher rate and additional rate taxpayer.
Dividends paid to basic rate tax payers before 6 April 2016
For dividends received before 6 April 2016 falling in the basic rate tax band (income up to £31,785 for 2015/16 (2014/15: £31,865) on top of the personal allowance), there is no further tax to pay. While the tax liability is 10% of the gross dividend received, this is entirely covered by the 10% dividend tax credit.
For dividends received after 5 April 2016 see our article How are dividends taxed?
Basic rate taxpayer - Example 1
Julie received gross dividends of £20,000 in the 2015/16 tax year and had no other income and was entitled to the standard personal allowance of £10,600. The dividends would be taxed in the following way:
- £10,600 has no tax as covered by Julie’s personal allowance.
- The balance of £9,400 falls in the basic rate tax band of £31,785 so is subject to 10% tax. This liability is covered by the 10% dividend tax credit, which means Julie has no further tax to pay.
Although the first £10,600 of dividend income is covered by the personal allowance, this will still have suffered the 10% dividend tax credit. Unlike with some other types of income, Julie cannot reclaim the tax credit. The full dividends suffered the 10% dividend tax credit so that Julie only received £18,000 but there is no way Julie can reclaim the tax credit. In the same way, if a non-taxpayer received a dividend in 2015/16, it will still be subject to the dividend tax credit – they could not elect to receive dividends gross or reclaim the tax credit from HMRC.
Basic rate taxpayer - Example 2
John had an annual pension of £20,000 in the 2015/16 tax year. He also received a net dividend of £4,500. This means has had a total gross income of £25,000 (because the tax credit of £500 is added to the net dividend). The pension income is taxed first and John will pay basic rate income tax on the part of his salary that exceeds his personal allowance. The dividends are taxed next but as these still fall below the upper limit of the basic rate tax band no further tax is due: it is covered by the 10% dividend tax credit.
Dividends paid to higher rate tax payers before 6 April 2016
If your gross dividends for the 2015/16 fell into the higher rate tax band (for the tax year 2015/16 this is taxable income between £31,785 and £150,000 (2014/15: income between £31,865 and £150,000) these are taxed at 32.5%. Part of this is covered by the 10% dividend tax credit, but you must pay further tax of 22.5% of the gross dividend (32.5% – 10%). That is the same as a further 25% of the net dividend received.
For dividends received after April 2016 by higher rate tax payers see our article dividend taxation: higher rate and additional rate taxpayers.
Higher rate taxpayer - Example 1
In 2015/16 Milly received a gross salary of £50,000 and also received a net dividend of £9,000. Milly’s whole personal allowance and the basic rate tax band of £31,785 are used up by her salary. The remaining part of her salary and the whole of the dividend will be subject to tax at the higher rate. The tax on the dividend is calculated as:
Net dividend received £9,000
Plus dividend tax credit £1,000
Gross dividend £10,000
The gross dividend is taxed at 32.5% so the total tax payable is £3,250. As £1,000 of this is covered by the dividend tax credit, it leaves Milly with a further £2,250 to pay.
Sometimes it is the dividend income that takes the taxpayer into the higher rate band. Therefore some of the dividend will taxed at the basic rate and some at the higher rate.
Higher rate taxpayer - Example 2
In 2015/16 Nathan was entitled to a personal allowance of £10,600 and received the following gross income:
- Salary – £26,385
- Bank interest – £10,000
- Dividend income – £20,000 (ie £18,000 plus tax credit)
Nathan’s salary is taxed first, so £10,600 is covered by his personal allowance with the remaining £15,785 falling in the basic rate band. This leaves £16,000 (£31,785 – £15,785) of the basic rate band available for other income. The bank interest of £10,000 is taxed next. Which leaves £6,000 of the basic rate band for dividend income.
The gross dividend of £20,000 is more than this, so £6,000 of the dividend will be subject to basic rate tax and the remaining £14,000 subject to higher rate tax.
The total tax due on the £20,000 gross dividend would therefore be as follows:
£6,000 taxed at 10% £600
£14,000 taxed at 32.5% £4,550
Total tax due £5,150
Part of the tax liability is covered by the 10% tax credit – in this case £2,000. So the remaining tax due is £5,150 – £2,000 = £3,150.
Dividends paid to additional rate tax payers before 6 April 2016
Dividends falling into the additional rate tax band (taxable income above £150,000) were taxed at 37.5%. Once again, part of this was accounted for by the 10% dividend tax credit, meaning an additional rate taxpayer had a further 27.5% tax of the gross dividend to pay. This equates to about 30.56% of the net dividend received.
For dividends received after April 2016 by additional rate tax payers see our article dividend taxation: higher rate and additional rate taxpayers.
Additional rate taxpayer - Example 1
Jordan received a salary of £175,000 in 2015/16. He also received net dividends of £27,000 which will all be subject to the higher rate tax.
The tax credit deemed to be received is therefore £3,000 (£27,000 / 9) and the gross dividend received is therefore £30,000. Based on a tax rate of 37.5%, the total tax due is £11,250.
With the tax credit of £3,000 set against this, Jordan will have a further £8,250 tax to pay for the 2015/16 tax year.
Once again it could be that only part of a dividend falls into the additional rate band. The following example shows both this and the way in which an individual’s entitlement to a personal allowance is reduced where income is over £100,000.
Additional rate taxpayer - Example 2
In 2015/16 Adrian received net dividends of £180,000, equivalent to gross dividend income of £200,000 which includes the deemed tax credit of £20,000 on top of his salary of £10,000.
Adrian has income of more than £100,000 so he loses £1 of his personal allowance for every £2 of income above £100,000. Therefore once his income for 2015/16 exceeds £121,200 no personal allowance is available. Adrian therefore has no personal allowance and all his dividend income is taxed, as follows:
- £21,785 of dividend income taxable at 10% as the salary of £10,000 uses up part of the basic rate band.
- £118,215 of dividend income (£150,000 – £31,785) taxable at 32.5%
- £60,000 of dividend income (£200,000 – £150,000) taxable at 37.5%
The tax due for the 2015/16 tax year will therefore be calculated as:
£21,785 @ 10% £2,178.50
£118,215 @ 32.5% £38,419.87
£60,000 @37.5% £22,500.00
Total tax due £63,098.37
Less tax credit £20,000.00
Additional tax due £43,098.37
How to pay any tax due
Where dividend income for 2015/16 fell into the higher rate and/or additional rate tax bands, you will have additional tax to pay.
Usually this tax should have been paid to HMRC by 31 January 2017.
If you complete a tax return you will need to include the dividend income in this. If you do not normally complete one but have higher and/or additional rate tax to pay on your dividend income, you should contact HMRC via your local tax office.
Inform Direct calculates the dividend and tax credit amounts for each shareholder and produces dividend vouchers for you to send to them.