From 6 April 2016 the tax rules around dividends changed. The dividend tax credit was replaced by the tax free dividend allowance and for the 16/17 tax year this is £5,000.
This means that the first £5,000 of dividend income is tax free (regardless of what other non-dividend income you might have).
Dividend income above this is taxed at:
- Basic rate band - 7.5%
- High rate band - 32.5%
- Additional rate band - 38.1%
Dividends received by pension funds and dividend received on shares held in an ISA will remain tax free.
Non dividend income of £8,000 and dividend income of £12,000 giving total income of £20,000 for the 16/17 tax year.
The personal allowance is £11,000 and so this covers off the £8,000 of non-dividend income and leaves £3,000 "spare" which can be offset against the dividend income.
So of the £12,000 of dividend income, £3,000 is covered by the personal allowance, £5,000 is covered by the dividend allowance leaving £4,000 to be taxed. In this example, this is within the basic rate band and so it is taxed at 7.5% = £300 of tax will be payable.
Non dividend income of £20,000 and dividend income of £6,500 giving total income of £26,500 for the 16/17 tax year.
The Non dividend income fully utilised the personal allowance so of the dividend income, £5,000 will be covered by the dividend allowance and £1,500 will be taxed at the basic rate of 7.5% = £112.50.