As many people know, currently, everyone benefits from a tax free dividend allowance of £2000 p.a. It is designed so people have have small dividend received from investments, do not need to worry about a tax return. BUT yes, the dividend allowance is not always tax free. If you earn between £100,000-£125,000 the situation is different.

CALCULATIONS

• If you earn £100,000+, you start to lose your personal allowance (the first £12500 tax free sum every one has).
• If you earn £125,000+, you have lost all of your tax allowance.
• During this range (£100-125k), whilst you lose your personal allowance, you pay an extra 20% tax on all income.
• The issue is, dividends count towards your total income even the £2000 tax free allowance.
• Therefore, whilst there is no direct tax on the dividend, your total income is £2000 higher causing you to pay 20% tax.

RESULT

• You pay an extra 20% tax on all dividends whilst your income is between £100-125k.
• Once your total income (excl' dividend) is >£125k, your £2000 dividend allowance takes effect again with no tax on the first £2000 dividend.
• If your dividends are more than £2000, and your income is between £100-125K you will pay 52.5% tax; 32.5% normal dividend tax plus the extra £20% mentioned above.

If you are not sure about anything, please call me.