Paying Tax On UK Dividends

Do you earn dividends from company shares, unit trusts or open ended investment companies (OEICs)?

If so, you pay tax on this income at different rates than you do on your income, pensions or other savings.  Our guide explains the tax rates for dividends and how you pay this tax.

Dividend tax rates for the 2011-12 tax year

The amount of tax you pay on your UK dividends depends on whether your total taxable income falls within or above the basic or higher rate income tax limits.  For the 2011/12 tax year, the basic income tax limit is £35,000 and the higher rate limit is £150,000.

  • Dividend income at/below the £35,000 basic rate tax limit – tax rate 10%
  • Dividend income at/below the £150,000 higher rate tax limit – tax rate 32.5%
  • Dividend income above the higher rate tax limit                – tax rate 42.5%

All dividends are taxed in the same way, irrespective of whether they come from an OEIC, unit trust or company share.

Dividends and tax credits

When you receive your dividend you will also receive a voucher that shows the total amount of the dividend you received and the amount of associated ‘tax credit’.

Companies pay dividends out of profits on which they have already paid – or are due to pay – tax.  The ‘tax credit’ takes account of this and is available to you to offset against any Income Tax that may be due on your ‘dividend income’.

When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your ‘dividend income’.

How tax credits are worked out

The dividend that you receive represents 90 per cent of your ‘dividend income’. The remaining 10 per cent of the dividend income is made up of the ‘tax credit’.

For example, if your ‘dividend income’ is £100, you will receive £90 and the ‘tax credit’ will be £10.

How you pay tax on dividend income

The way that you pay the tax owed depends on what rate tax you pay:

  • At/below basic rate – You have no tax to pay on your dividend income because the tax liability is 10 per cent; the same amount as the tax credit
  • At the higher rate – You pay a total of 32.5 per cent tax on dividend income that falls above the basic rate Income Tax limit. In practice, however, you only owe 25 per cent of the dividend paid to you because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit
  • At the additional rate – You pay a total of 42.5 per cent tax on dividend income that exceeds the higher rate Income Tax limit.  In practice, however, you only owe 36.1 per cent of the dividend paid to you because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit

If you normally complete a Self Assessment tax return you’ll need to show the dividend income on it.  If you don’t complete a tax return, but you have higher rate of tax to pay on your dividend income, you should contact your Tax Office.

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