£5000 dividend allowance not available to all?

As you are all probably aware, the new allowances for dividends introduced in April this year mean you can earn £5000 of gross dividend income before having to pay tax, no matter what kind of tax payer you are. Earnings above your allowance are then taxed as:

7.5% for Basic Rate tax payers

32.5% for Higher Rate tax payers

38.1% for Additional Rate tax payers

But what you may not know is that this does not apply to trusts or trustees. Any dividend income generated (regardless of whether it is paid out to the beneficiaries or not) will be taxed at the 38.1% rate, as all trust income is automatically taxed in the Additional Rate band.

If this dividend income is paid out to beneficiaries then it ceases to be dividend income but is instead considered to be trust income and is taxable at the highest rate of 45%; it is not allowed to be part of the individual beneficiaries’ dividend allowance.

It is quite aggravating that this allowance has not been transferred to trusts, as it means that those trying to protect their funds are losing out on effectively “tax free” income available to every other individual. The complex nature of trusts was probably too much to consider in this instance, but this just means that you need to be very careful when distributing funds from within a trust and you should almost certainly seek advice before doing so.