Income Tax on Dividend Income

If a Company in which you own shares makes a profit, it will generally be subject to corporation tax on its profit. After allowing for tax, any profit remaining may be distributed to the shareholders in the form of a Dividend.

UK taxpayers are liable to personal income tax on dividend income if that dividend income pushes their total income over the level of their tax free allowance.

The following table shows UK Dividend Income Tax rates (all assume income beyond the tax free allowance).

The calculation of your tax liability is complicated by the fact that, where a dividend is received from a UK company, it is accompanied by a tax credit. The tax credit is in recognition of the fact that the company has probably already paid corporation tax on the profit, but is not actually linked to or affected by the amount of corporation tax actually paid. Some companies will pay corporation tax at the ‘Large Company’ rate of 23%, some at the ‘Small Company’ rate of 20%, and some may pay no corporation tax at all due to eg R&D tax credits, or the treatment of goodwill. Whatever the company has paid,

• The shareholder receives the same deemed tax credit: 11% of the cash dividend received.
• The shareholder’s taxable income = cash received (say £1.00) + the tax credit (£0.11 in this case) = £1.11
• For basic rate taxpayers the £0.11 tax credit cover the tax cost of 10% x £1.11

(all figures below are rounded, and apply to 2010-11 thresholds, see above for tables showing how the thresholds have changed for 2011-12 and 2012-13): If your earnings are;

• Less than £35,000 – you would not pay any further Income Tax
• More than £35,000 (but less than £15,000) then: Your taxable income = £1.11, the tax due is 32.5% of £1.11 = £0.36 After allowing for the £0.11 tax credit, the additional tax due is £0.25 which is 22.5% of £1.11
• More than £150,000 then: Your taxable income = £1.11, the tax due is 42.5% of £1.11 = £0.47 After allowing for the £0.11 tax credit, the additional tax due is £0.36 which is 32.5% of £1.11

If you receive dividend from a non-UK company, the default assumption is that you do not receive a tax credit unless one is due under a double tax treaty between the UK and the country where the company is based; that country may impose a withholding tax on dividend payments to overseas shareholders (the UK does not impose such withholding taxes).

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