You pay tax at different rates on UK dividends (income from UK-resident company shares, unit trusts and open ended investment companies) than you do on interest from savings, such as bank and building society interest.
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There are three different Income Tax rates on UK dividends. The rate you pay depends on whether your overall taxable income (after allowances) falls within or above the basic or higher rate Income Tax limits.
The basic rate Income Tax limit is £31,865 and the higher rate Income Tax limit is £150,000 for the 2014 to 2015 tax year.
|Dividend income in relation to the basic rate or higher rate tax bands||Tax rate applied after deduction of Personal Allowance and any Blind Person's Allowance|
|Dividend income at or below the £31,865 basic rate tax limit||10%|
|Dividend income at or below the £150,000 higher rate tax limit||32.5%|
|Dividend income above the higher rate tax limit||37.5%|
It doesn't matter whether you get dividends from a company, unit trusts or open-ended investment company, as all dividends are taxed the same way.
But bear in mind that interest distributions from unit trusts and open-ended investment companies are taxed at the rates for savings income - see below.
There are four different Income Tax rates on savings income: 10%, 20%, 40% or 45%. The rate you pay depends on your overall taxable income.
When you get your dividend you also get a voucher that shows:
If you have agreed to get your dividends paid electronically you may get your dividend voucher in paper or electronic form.
Companies pay you 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 the shareholder to offset against any Income Tax that may be due on their 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.
The dividend you are paid represents 90% of your 'dividend income'. The remaining 10% of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10% of the dividend income.
|Dividend paid to you (represents 90% of the dividend income)||Tax credit (10% of the dividend income)||Dividend income (dividend paid plus tax credit)|
You have no tax to pay on your dividend income because the tax liability is 10% - the same amount as the tax credit - as shown in the earlier tables.
You pay a total of 32.5% tax on dividend income inclusive of tax credit where this falls above the basic rate Income Tax limit (£31,865 for the 2014 to 2015 tax year). In practice, however, you owe only 25% of the dividend paid to you after the tax credit has been taken into account.
Between 6 April 2010 and 5 April 2013 you pay a total of 42.5% tax each year (37.5% from 6 April 2013) on dividend income that exceeds the higher rate Income Tax limit (currently £150,000). But because the first 10% of the tax due on your dividend income is already covered by the tax credit, in practice for tax years from 6 April 2010 to 5 April 2013 you owe only 36.1% of the dividend paid to you (30.6% from 6 April 2013).
Note that dividend income, like savings income, is taxed after your non-savings income - for example, wages and self-employment profit - at your highest tax rate. For example, if it falls both sides of the £32,010 basic rate tax limit, it will be taxed partly at 10% (and covered by the tax credit) and partly at 32.5% (less the 10% tax credit).
If you normally complete a 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 HMRC.
No. You can't claim the 10% tax credit, even if your taxable income is less than your Personal Allowance and you don't pay tax. This is because Income Tax hasn't been deducted from the dividend paid to you - you have simply been given a 10% credit against any Income Tax due.