Under the current legislation, dividends attract a 10% tax credit which means that basic rate tax payers pay no tax on £28,800 of dividend income (assuming all of the personal allowance has been used by on other income), while higher rate tax payers pay an effective rate of 25%.
This is because dividends are paid out of Company Profits after Corporation Tax has been paid.
From April 2016, this will be changing. The first £5000 of dividend income will be tax free. This is called the Dividend Allowance. After that, it will be taxed at 7.5% for basic rate tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate tax payers.
Lewis has his own Limited Company. He takes a minimum salary of £8,060.00 with the remainder of his income, £12,000, as dividend income.
Personal Allowance for 16/17 year £11,000
Dividend Allowance £5,000
Tax will be paid on £4,060.00 at rate of 7.5% £304.50
This is the government factsheet on the Dividend Allowance – click here