Under current arrangements, basic rate taxpayers pay no tax on dividends received. Higher and additional rate tax payers pay tax at 25% and 30.55% respectively.

However in the Summer Budget on 8 July, Chancellor George Osborne announced that from April 2016, the existing system would be replaced.

Under this new system all individuals that received dividend income will receive a dividend allowance. This allowance means that no tax will be payable on the first £5,000 of dividend income regard less of the amount of non-dividend income received.

There will also be a change in tax rates chargeable on dividend incomes. You will now pay tax on any dividends exceeding the £5,000 allowance 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

Dividends within your allowance, although not being taxed themselves, will still count towards you basic or higher rare bands, and may therefore affect the rate of tax you pay on dividends you receive in excess of the £5,000 allowance.

Please note that dividends received from pension funds and Individual Savings Accounts (ISA), which are currently exempt from tax, will continue to be tax free.

This simpler systems will mean that only those with significant dividend income will pay more tax. If you have modest income from shares, you will either see a tax cut or no change in the amount of tax you owe.