HMRC has confirmed a rise in personal allowances for the new tax year starting 6 April 2021 while the dividends rate is frozen
The personal allowance has increased by £70 to £12,570 for tax year 2021/22 and will then be frozen until 2026 as announced in the Budget in March.
The personal allowance goes down by £1 for every £2 of income above the £100,000 limit. It can go down to zero.
In Scotland, taxpayers pay the Scottish rate of income tax (SRIT) which sees a starter rate of 19% which is paid for the first £2,097, up from £2,085 in 2020/21. After this, the basic tax rate is 20%, from £2,098 to £12,726, up from £2,086 to £12,658.
The intermediate rate in Scotland is 21% for those earning £12,727 to £31,092, up from £12,659 to £30,930. The higher rate is 40%, as in the rest of the UK, kicking in at £31,093 to £150,000, up from £30,931 to £150,000 the previous year. There is a differential of 1% for additional top rate taxpayers earning over £150,000, who are liable for tax at 41%.
The dividend allowance remains at £2,000 and tax is only paid on dividends over this amount. The rate was cut from £5,000 in tax year 2017/18 and has remain unchanged since that date.
The rate paid on dividends depends on the taxpayer’s individual tax band. Basic rate is 7.5%, higher rate at 32.5% and the additional rate is 38.1%.
You get £3,000 in dividends and earn £29,570 in salary in the 2020 to 2021 tax year.
This gives you a total income of £32,570.
You have a personal allowance of £12,570. Take this off your total income to leave a taxable income of £20,000.
This is in the basic rate tax band, so you would pay:
- 20% tax on £17,000 of wages;
- no tax on £2,000 of dividends, because of the dividend allowance; and
- 7.5% tax on £1,000 of dividends.
Anyone earning over £10,000 in dividends has to register for self assessment and pay the tax by 31 January of the relevant tax year.