Dividend Nil-Rate – What You Need to Know

At McDade Roberts we pride ourselves on a friendly and where possible jargon free approach to accounting. One subject we sometimes have to explain to our clients is Dividend Nil Rate so read on if you want the top line facts.

What is Dividend Nil Rate?

A person does not have to pay tax on the first £2,000 of dividend income, regardless of the level of non-dividend income. Tax is charged on dividends received over £2,000 at the following rates:

  • 5% on dividend income within the basic rate band
  • 5% on dividend income within the higher rate band
  • 1% on dividend income within the additional rate band.

The Dividend Allowance does not reduce total income for tax purposes and dividends within the allowance still count towards the appropriate basic or higher rate bands. They may therefore affect the rate of tax payable on dividends received in excess of the £2,000 allowance.

Example 1

This example, based on 2020/21 tax rates and allowances, shows the taxable amounts.

 

Non-Dividend Income

Dividend Income

 

18,000

22,000

Personal Allowance

12,500

 -

Taxable at basic rate (20%)

5,500

-

Taxable at 0% (dividend allowance)

 

2,000

Taxable at 7.5%

 

20,000

Example 2

This example shows a higher rate taxpayer. The Dividend Allowance uses up some of the basic rate band and so less is available to be taxed at 7.5% rather than 32.5%.

 

Non-Dividend Income

Dividend Income

 

35,000

19,000

Personal Allowance

12,500

-

Taxable at basic rate

22,500

 -

Taxable at 0% (dividend allowance)

-

2,000

Taxable at 7.5% (up to remaining basic rate band)

 -

13,000

Taxable at higher rate (32.5%)

-

4,000

If you are struggling to work out the impact of dividends on your personal tax planning, why not give us a call. We aim to talk in your language and the first consultation is free so you have nothing to lose.

Call us on 01772 717110 and you can find our contact details here too.