Tax on UK dividends
You pay tax at different rates on UK dividends (income from UK company shares, unit trusts and open ended investment companies) than you do on interest from savings, such as bank and building society interest.
On this page:
- Dividend tax rates 2009-10
- How dividends are paid
- Understanding the dividend tax credit
- Paying tax on dividend income
- Can you claim the tax credit if you don't normally pay tax?
- More useful links
Dividend tax rates 2009-10
There are two 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 rate Income Tax limit.
The basic rate Income Tax limit is £37,400 for the 2009-10 tax year.
Dividend tax rates 2009-10
| Dividend income in relation to the basic rate tax band | Tax rate applied after deduction of Personal Allowance and any Blind Person's Allowance |
|---|---|
| Dividend income at or below the £37,400 basic rate tax limit | 10% |
| Dividend income above the £37,400 basic rate tax limit | 32.5% |
It doesn't matter whether you get dividends from a company, unit trusts or open-ended investment companies, 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.
Tax on savings income
There are three different Income Tax rates on savings income: 10 per cent, 20 per cent or 40 per cent. The rate you pay depends on your overall taxable income.
Tax on bank and building society accounts
Check up-to-date figures on tax rates
How dividends are paid
When you get your dividend you also get a voucher that shows:
- the dividend paid - the amount you received
- the amount of associated 'tax credit' - see next section
If you have agreed to get your dividends paid electronically you may get your dividend voucher in paper or electronic form.
Understanding the dividend tax credit
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.
How tax credits are worked out
The dividend you are paid represents 90 per cent of your 'dividend income'. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the dividend income.
Dividend income at or below the £37,400 basic rate tax limit
| Dividend paid to you (represents 90% of the dividend income) | Tax credit (10% of the dividend income) | Dividend income (dividend paid plus tax credit) |
|---|---|---|
| £63 | £7 | £70 |
| £54 | £6 | £60 |
| £90 | £10 | £100 |
Paying tax on dividend income
If you pay tax at the 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 - as shown in the earlier tables.
If you pay tax at the higher rate
You pay a total of 32.5 per cent tax on dividend income that exceeds the basic rate Income Tax limit (£37,400 for the 2009-10 tax year). But because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit, in practice you owe only 22.5 per cent.
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. If it falls both sides of the £37,400 higher rate
tax bracket, it will be taxed partly at 10 per cent (and covered by the
tax credit) and partly at 32.5 per cent (less the 10 per cent tax credit).
Can you claim the tax credit if you don't normally pay tax?
No. You can't claim the 10 per cent 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 per cent credit against any Income Tax due.
Declaring dividend income on your Self Assessment tax return
If you normally complete a tax return you fill in three boxes:
- the 'dividend/distribution' - the actual amount you were paid
- the tax credit - as shown on the dividend voucher
- the total of these two - the 'dividend income'
You pay any extra tax owing via either Self Assessment or PAYE (Pay As You Earn), depending on how you normally pay tax.
Do you need to fill in a tax return?
Find out more about Self Assessment
More useful links
Learn about different types of savings and investments on the Directgov website
Read a beginner's guide to Income Tax
Tax refunds and reclaiming overpaid tax
Read about tax on property and rental income on the Directgov website
