Despite the comprehensive changes to the taxation of dividends in Finance Act 2016, the tax treatment of dividends makes the payment of dividends a popular method of extracting profit for several reasons.
From 6 April 2016, individuals are entitled to a £5,000 'dividend allowance'. Dividend receipts over and above this allowance are taxed according to the income level of the recipient; 7.5% for dividend income falling within the basic rate band, 32.5% for dividend income falling within the higher rate band, and 38.1% for dividend income falling within the additional rate band, see T6.104.
Prior to 6 April 2016, dividends were deemed to carry a tax credit at the rate of 1/9 of the amount paid (10% of the gross of dividends plus tax). If the shareholder had no liability to income tax, then the credit was not repayable. However, if the recipient's income fell into the starting rate or basic rate band this notional credit was deemed to frank the full income tax liability. Dividends falling within the higher rate band were taxed at 32.5%. Dividends falling within the additional rate band were taxed at 37.5%.
For further details of income tax rates see