Uncovering the dividend allowance

What is the dividend allowance and how does it impact a decision to invest in dividend yielding assets?
October 2019

Barry Foster

Vice President,
Strategic & Technical Sales

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Risk Disclaimer

This content is based on our understanding of legal and tax regulations and practice at the time of writing (October 2019). It has been produced for information only. We do not provide tax, accounting, regulatory or legal advice. No action must be taken or refrained from being taken based on this content alone.

Key takeaways:

  • Understanding the dividend allowance
  • How to invest in dividend yielding assets without being affected by the dividend allowance
  • Why the dividend allowance is actually an income tax nil rate band rather than a true allowance

What is the dividend allowance and how does it impact a decision to invest in dividend yielding assets?

The landscape of taxation of dividends in the hands of individuals changed fundamentally on 6 April 2016 when the following significant changes to the taxation of savings income were made:

  • The dividend allowance was introduced
  • The notional (and non-reclaimable) 10% tax credit was abolished
  • The income tax rates applicable to dividend income were increased
  • The Personal Savings Allowance (PSA) was also introduced

The dividend allowance was initially £5,000 but is now £2,000.

There was a lot of discussion at the time about ‘“when an allowance is not really an allowance’”. That is to say there was some confusion initially about whether dividend income within the dividend allowance was taxable income or not.

It is of course taxable income, meaning that the allowance is really a nil rate band: income within the allowance is taxable but charged at 0%. The same applies to savings income within the PSA. Income charged at 0% is not the same as income that is non- taxable.

Download our full article where we review this distinction via a case study and explore how dividend income straddles the basic and higher rate tax bands. 

Risk Disclaimer

This content is based on our understanding of legal and tax regulations and practice at the time of writing (October 2019). It has been produced for information only. We do not provide tax, accounting, regulatory or legal advice. No action must be taken or refrained from being taken based on this content alone.