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 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 

View our Guide to Self Assessment Tax Returns

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.