For the tax year ending 5th April 2017 onwards the way in which dividends will be subject to tax has fundamentally changed from previous years.
Previously, dividends were effectively taxed at the following rates:
| Tax band | Effective dividend tax rate |
| Basic rate (and non-taxpayers) | 0% |
| Higher rate | 25% |
| Additional rate | 30.56% |
| Additional rate – dividends paid before April 2013 | 36.11% |
Note that the basic rate band occurs AFTER your personal allowance. The tax rates and bands for the current 2016/17 tax year are:
| Band | Taxable income |
| Personal Allowance | Up to £11,000 |
| Basic rate | £11,001 to £43,000 |
| Higher rate | £43,001 to £150,000 |
| Additional rate | over £150,000 |
For the current tax year onwards, there is also a new dividend allowance of £5,000. This means that you can receive up to £16,000 in dividends without paying tax.
In the future dividends will be taxed at the following rates:
| Tax band | Tax rate on dividends over £5,000 |
| Basic rate | 7.5% |
| Higher rate | 32.5% |
| Additional rate | 38.1% |
These changes will have winners and losers.
The biggest winners will arguably be tax payers who receive the majority of their income through a salary but only receive a small amount of dividends.
The biggest losers will arguably be small to medium owner managed businesses who operate as a limited company and derive the majority of their income as dividends within the taxable bands.
More specific examples can be found at the excellent Ross Martin tax resource website.