The dividend allowance was put in place in April 2016. It means that the first £2,000 of dividends you receive are tax-free. But how does this allowance work in practice in the 2022/23 tax year?
The allowance was implemented in April 2016, as part of a radical shake-up in the way dividends are taxed.
Dividends are taxed at a flat rate during the 2022/23 tax year, according to the tax band they fall into – Basic Rate (8.75%), Higher Rate (33.75%) and Additional Rate (39.35%).
The one concession was the creation of a tax-free ‘dividend allowance’ applied to the first £5,000 of dividend income.
However, from April 2018, the allowance was cut to just £2,000. It has remained at this level ever since.
This means that the first £2,000 of dividend income you receive is not taxed at all, but significantly, this sum still sits within the relevant tax band for overall taxation purposes.
How much is the dividend allowance in 2021/22 and 2022/23?
The allowance is £2,000 for the 2021/22 and 2022/23 tax years.
This is separate from the personal allowance which is £12,570 for both tax years.
How does the dividend allowance work in practice?
Here is an example of how this tax concession works for a limited company owner drawing down a £12,570 salary plus £50,000 dividends during the 2022/23 tax year. You can input your own salary/dividend mix into our dividend tax calculator.
- The £12,570 salary takes up the entire 2020/21 tax-free personal allowance.
- The first £2,000 of dividends is tax-free, due to the dividend allowance.
- The next £35,700 of dividends are taxed at 8.75% (basic rate) = £3,123.75.
- The remaining £12,300 dividends are taxed at 33.75% (higher rate) = £4,151.25.
- The total dividend tax liability is £7,275.
Notice how the £2,000 dividend allowance is tax-free, but still takes up the first £2,000 of your basic rate tax band (£0-£37,700 during 2022-23).
According to the Budget documentation, the allowance cut is expected to raise an extra £800m to £900m per year for the Treasury.
You can download a Government explanation of the dividend allowance reduction (published following the Spring Budget 2017).