BN 40: Taxation of personal dividends

Who is likely to be affected?

Legislation will be introduced in Finance Bill 2008 to simplify the system of taxation for individuals who own foreign shares.
Individuals in receipt of dividends from UK-resident companies are entitled under current law to a non-payable dividend tax credit. From 2008 individuals in receipt of dividends from non UK-resident companies will also be entitled to a non-payable dividend tax credit, subject to certain conditions.

Dividends received by individual shareholders are taxed at rates of 10%, 10% and 32.5% for lower rate, basic rate and higher rate taxpayers respectively.
When dividends from UK-resident companies are charged to tax, shareholders are entitled to a non-payable tax credit of one ninth of the distribution under the provisions of section 397 (1) of the Income Tax (Trading and Other Income) Act 2005. Because tax is charged on the gross dividend received, including the tax credit, this lowers the effective rates of tax on these dividends at the personal level to 0%, 0% and 25%.
The proposed changes will from 6 April 2008 extend the non-payable tax credit of one ninth of the distribution to individuals in receipt of dividends from non UK-resident companies, subject to certain conditions. A person will qualify for the non-payable dividend tax credit if they own less than a 10% shareholding in the distributing non UK-resident company, and in total they receive less than £5,000 of dividends a year from non UK- resident companies.
The Government is also considering whether it is possible to extend the non-payable tax credit, without creating scope for abuse, to the small minority of individuals who do not meet the conditions outlined above.

If you have any questions about this change, please contact Andrea Pierce on 020 7147 2591 (email: Andrea.Pierce2@hmrc.gsi.gov.uk).

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