Dividends and personal allowances

Dividends and personal allowances are a hot topic at the moment. And why? Well, since 6 April 2016, the first £5,000 of dividend income has been taxed at 0%. However, this does not mean dividends are ignored for tax purposes. They still count towards total taxable income, which can impact other allowances.

For example, if your employment income is £100,000 and you receive £5,000 in dividends, your taxable income becomes £105,000. This matters because once taxable income exceeds £100,000, the personal allowance begins to reduce by £1 for every £2 earned above this threshold.

As a result, the extra £5,000 in dividends leads to a £2,500 reduction in personal allowance, increasing your tax bill by £1,000.

The Tax Trap for Higher Earners

Many individuals assume that since £5,000 of dividend income is taxed at 0%, it will not impact other tax calculations. However, because dividends still count towards total income, they can:

  • Reduce personal allowances for those earning over £100,000.
  • Push taxpayers into higher tax bands, increasing tax on other income.
  • Affect entitlement to tax-free savings and child benefit for those earning over £50,000.

Understanding dividends and personal allowances is crucial for effective tax planning, particularly for higher earners.

How We Can Help

At Lewis Brownlee, we specialise in tax planning, ensuring clients maximise tax efficiency while staying compliant. In fact, we even have leaders in the field in our very offices. So, if you have any concerns at all, we can easily clarify the complexities. Plus, we offer a free introductory meeting so that you can find out what we do and how we do it before you commit. So, what are you waiting for. Call us today and together let’s partner in your tax success!

For expert tax advice, contact us today.

Final Thoughts

Receiving dividends and personal allowances requires careful tax planning to avoid unexpected tax bills. Ensuring your income is structured efficiently can help reduce tax liabilities and maximise allowances.