Tax on UK dividends

What is a dividend? To put it simply, a dividend is money that a limited company pays to its shareholders. Only limited companies can pay dividends; partnerships and sole traders cannot. Many limited companies pay regular…

10 Minute Read

Updated: 07 Feb 2013

What is a dividend?

To put it simply, a dividend is money that a limited company pays to its shareholders. Only limited companies can pay dividends; partnerships and sole traders cannot. Many limited companies pay regular dividends to shareholders on a quarterly basis, and if you have a considerable number of shares, this can certainly add up. Income from such investment is taxable and there are three different rates. Today, SimpleTax will explain the different income tax rates on UK dividends.

Different dividend tax rates

Much like regular income there are different income tax rates on UK dividends.  The rate you pay is determined on whether you fall in the basic or higher rate of income tax.

For tax year 2012/2013:

Basic rate taxpayers – Dividend income at or below £34,370 is payable at 10%

Higher rate taxpayers – Dividend income at or below the £150,000 is payable at 32.5%

Additional rate taxpayers – Dividend income above £150,000 is payable at 42.5%

 

Dividend tax credit

Because limited companies pay dividends from company profit, dividend income IS taxable. This is where the dividend tax credit comes into play. The dividend tax credit is available to shareholders to offset the tax charge due on their dividend income.

Dividends are paid at 90% (1/9) of the amount you actually receive as a shareholder. The remaining 10% is tax credit.

So, here’s how it works:

Basic rate – For basic rate taxpayers, you have no tax to pay! This is because the tax liability is the same as the tax credit (both 10%), so the entire tax is satisfied by the tax credit.

For example:

Income – £1000

Tax (10%) – £100

Tax credit (10%) – £100

Tax payable – £0

 

Higher rate – If you fall into the higher rate, then you have to pay 32.5% on dividend income, of which you receive a 10% tax credit. In practice, the higher rate has an additional tax liability to account for, amounting to 22.5% of the gross dividend.

Income – £1000

Tax (32.5%) – £325

Tax credit (10%) – £100

Tax payable – £225

 

Additional rate – If you fall in the additional rate, you pay 42.5% on dividend income, of which you receive, a 10% tax credit. In practice, the additional rate has an additional tax liability to account for, amounting to 32.5% of the gross dividend.

Income – £1000

Tax (42.5%) – £425

Tax credit (10%) – £100

Tax payable – £325

If you receive dividend income, whether you pay tax or not, you must declare dividend income each year via self-assessment. But don’t worry, SimpleTax is here to make things extra easy. Take the hassle-free route to filing your taxes; Go SimpleTax 

 

Need a simple Tax Guide? Click here.

 

Trusted by over 10,000 subscribers

You don't need to be an expert to complete your self assessment tax return.

Get Started

How GoSimpleTax Works

01.
Register

Simply register for free with your full name and email address.

02.
Select Your Income

Select the income you receive and follow the hints and tips for potential tax savings.

03.
Validate Your Information

Validate your personal information and submit directly to HMRC to get confirmation in just seconds.

frequently asked questions

Work Anywhere, With Any Device

Gone are the days of fretting over a calculator surrounded by scraps of paper at the eleventh hour.

GoSimpleTax’s tax return software uses the information you upload in real time to calculate your income and expenditure, working out the tax you owe and sending you helpful notifications when there’s the possibility of a mistake.

Get Started

"The software is intuitive and proved very easy to navigate. I found the whole process refreshingly simple. I saved a lot of money too!"

Steve J.

Ordained Presbyter

"Easy to use and value for money. Everything you need to do your tax."

Gordon J.

Self Employed

"It fills in all the forms and sends them to the Inland Revenue. Not expensive either. Takes the stress out of doing your tax return online."

Ross G.

Team Rector

Get Started