Question: I’m a pensioner and my income over the past five years has been made up of pension income and dividends. My son has advised me that I might need to start completing a Self-Assessment tax return. Mrs H of Little Common asks if this is true?
Your son was right to advise you to look into this matter further.
As you may be aware, the way that dividends are taxed has undergone an overhaul in the past couple of years.
You will note from your dividend vouchers prior to 6 April 2016 that there was a dividend amount and a ‘tax credit’ amount shown. These two figures would be added together to make up your total dividend income were you to complete a tax return.
The dividend amount would then be taxed dependant on what Income Tax band they fell into. If your total income was previously within the basic rate tax band then you would not have had to pay any tax on your dividends.
The new rules have seen the abolition of the ‘tax credit’ and the introduction of a tax-free dividend tax allowance of £5,000. This means that your first £5,000 of dividend income is tax free; however, if you receive over £5,000 of dividend income in the year ended 5 April 2017, you may need to pay tax on any dividends in excess of the allowance. Note that dividends that fall within your Personal Allowance do not count towards your £5,000 dividend allowance.
The rate of tax that you pay will depend on your other income but dividends within the basic rate band would be taxed at 7.5%, 32.5% in the higher rate band and 38.1% in the additional rate band.
Following recent announcements, the dividend allowance will reduce to just £2,000 from 6 April 2018, so if you do not fall into the Self-Assessment criteria currently, you may find that this changes in future years.
In summary, if you find that your dividend income is between £5,000 and £10,000 you may opt to complete a Self-Assessment tax return; however, alternatively you can ask HMRC to change your tax code and the tax can be taken from your pension or wages.
If you are unsure and would like to discuss your circumstances in greater detail, Ashdown Hurrey can advise on personal tax matters in addition to other tax, accountancy and business matters. Contact Martin Copland on 01424 720222 or email him at firstname.lastname@example.org.