From April 2016 the dividend tax credit is going to be replaced with a new tax free dividend allowance. The new dividend allowance will mean that you will not have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.
You will have to pay tax on any dividends that you receive over £5,000 at the new rates.
Ø 7.5% on dividend income within the basic rate band
Ø 32.5% on dividend income within the higher rate band
Ø 38.1% on dividend income within the additional rate band
The dividend allowance isn’t going to reduce your total income for tax purposes.
For example if you have a total dividend income of £20,000, you pay tax on £15,000 which would amount to £1,125.
Dividends that you receive from pension funds are currently exempt from tax and dividends that you receive on shares that are held in a ISA will continue to be tax free.