Changes to Tax Liability

Question. I own a Company and extract a salary of £10,000 per annum and a dividend of £30,000. For 2015/16, I paid no tax on this income. I know there has been changes to how dividends are taxed. Can you explain what my tax liability will be in 2016/17 and what impact the recent budget will have on my income for the forthcoming tax year 2017/18?




Based on your current sources of income for 2016/17 your income tax liability would be £1,800. Your 2016/17 personal allowance of £11,000 would be offset first against your salary and the remaining balance of £1,000 would be offset against your dividend income.


From 6 April 2016, a new dividend allowance of £5,000 and dividend tax rates were introduced. This means that the first £5,000 of dividend income is taxed at 0% and any excess taxed at 7.5% (basic rate tax payer), 32.5% (higher rate tax payer) and 38.1% (additional rate tax payer). As you are a basic rate tax-payer, any additional dividend income above £5,000 would be taxed at 7.5%.


The recent budget announced that from 6 April 2017, the personal allowance has been increased to £11,500 and from 6 April 2018 the dividend allowances (currently £5,000) will be reduced to £2,000.


For the 2016/17 tax year and assuming that there are no changes to your income prior to the 5 April 2017, your income tax liability should reduce by £37.50. For the 2017/18 tax year, if you remain a basic rate tax payer and receive a similar level of dividend, the reduction in the dividend allowance could result in an increase in your tax liability by approximately £225.

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