Tax on UK Dividends

The majority of savings and investments in the UK are subject to tax in one form or another. If you have a variety of different investment vehicles however, the tax that is levied may be different for each one. UK dividends incur Income Tax at a different rate to that at which it must be paid on other savings and investments. For example, you will pay a different amount of Income Tax on dividends than you will on interest from a building society account. The specific rate at which they are taxed depends, however, on your total taxable income. Rates There is currently a basic rate Income Tax threshold, which is set at £34,600 for the tax year running until April 2008. If your overall taxable income for the year exceeds that threshold, you will be required to pay tax on your dividend income at a considerably higher rate than if your overall taxable income falls within it. Currently, if you exceed the threshold then your dividend income will be taxed at a rate of 32.5%; if your overall taxable income falls within the threshold, your dividend income will be taxed at a rate of 10%. It is important to note that ‘dividend income’ is not the same as the sum of the dividends you have received. Rather, dividend income describes the total reached when this sum is added to any associated tax credit which is made available to you. Dividends are paid to shareholders from income on which tax has already been paid by the company; as a result, shareholders are given tax credits which they can use to offset against the Income Tax bill for your dividend income. The tax credit makes up 10% of your total dividend income. If, for example your dividend income was £100, only £90 of this would be the dividend itself. The Effect of Tax Credits In reality, the tax credit system means that investors who pay tax at or below the basic rate are required to pay no tax whatsoever on their dividend income. This is because, for these individuals, dividend income is taxed at a rate of 10%, but this has already been absorbed by the tax credit. If, on the other hand, you are a higher rate taxpayer, you will be required to pay tax at a rate of 32.5%, as mentioned above. However, the 10% tax credit again mitigates your liability, bringing the ‘real’ rate down to 22.5%. The way in which you pay tax on dividend income will depend on how you normally pay the rest of you Income Tax. If you are a self-assessment taxpayer, you will be required to fill in three sections relating to dividends: the ‘dividend/distribution’ box, in which you should write the amount that you received; the ‘tax credit’ box, the value of which will be shown on your dividend vouchers; and the ‘dividend income’ box, which is the total of the above two. If you are a Pay As You Earn taxpayer, any Income Tax that you owe on dividend income will be automatically deducted from your wage packet along with the rest of your tax.

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