Tax free dividends to reduce to £1,000 in the UK from 2023/24
If you’re an investor in the UK, you may have heard about the upcoming change to the dividend nil rate band. From April 6th, 2023, the dividend nil rate band will be reduced from £2,000 to just £1,000. This means that any dividends received above £1,000 will now be subject to taxation.
This change may have a significant impact on the tax liabilities of individuals who rely on dividends as a source of income. Here’s what you need to know about the upcoming change, and how it might affect you.
What is the dividend nil rate band?
The dividend nil rate band is a tax allowance that allows individuals to receive a certain amount of dividend income tax-free. Prior to April 6th, 2018, the dividend nil rate band was set at £5,000. However, as of April 6th, 2018, the dividend nil rate band was reduced to £2,000. And from April 6th, 2023, it will be further reduced to just £1,000.
This means that individuals can now only receive up to £1,000 in dividend income each year without paying tax on it. Any dividend income received above £1,000 will be taxed at the appropriate rate.
Why has the dividend nil rate band been reduced?
The reduction in the dividend nil rate band was announced by the UK government as part of its ongoing efforts to raise revenue. The government estimates that the change will affect around 1.25 million individuals, and will raise approximately £830 million in revenue over the next four years.
The government has stated that the reduction in the dividend nil rate band is aimed at ensuring that individuals who receive significant dividend income pay their fair share of tax. The change is also intended to discourage individuals from using dividend income as a way of avoiding tax on their salary or other income.
How will the reduction in the dividend nil rate band affect me?
The impact of the reduction in the dividend nil rate band will depend on your individual circumstances. If you receive dividend income of less than £1,000 per year, then the change will not affect you at all.
However, if you receive dividend income of more than £1,000 per year, then you will now be subject to tax on the amount above the new threshold. The amount of tax you will need to pay will depend on your income tax bracket.
For basic rate taxpayers, dividends will be taxed at a rate of 8.75% above the £1,000 threshold. For higher rate taxpayers, dividends will be taxed at a rate of 33.75% above the £1,000 threshold. For additional rate taxpayers, dividends will be taxed at a rate of 39.35% above the £1,000 threshold.
What can I do to minimise the impact of the reduction in the dividend nil rate band?
If you’re concerned about the impact of the reduction in the dividend nil rate band on your tax liabilities, there are a number of steps you can take to minimise its impact. Here are a few examples:
- Consider investing in tax-efficient vehicles, such as ISAs, which can provide tax-free income and gains.
- Consider spreading your investments across different companies and sectors to reduce your exposure to any one dividend-paying stock.
- Consider speaking to a financial advisor or tax professional to discuss your options and develop a strategy that is tailored to your individual circumstances.
In conclusion, the upcoming reduction in the dividend nil rate band is set to have a significant impact on the tax liabilities of investors who rely on dividends as a source of income.
