Dividend Tax

As with all income earned from PAYE, savings, capital gains and investments any dividends received from UK compannies are taxable.

In the UK the dividend tax rates are different from traditional income tax and a dividend tax credit regime applies and is important for tax planning. See below for full information.

Tax Rates on UK Dividends

Much like regular income there are different tax rates applied much like the regular and higher rate tax brackets. The current rates are as follows

What is a Dividend ?

A dividend is payable to shareholders from distributable company profits after corporation tax is paid and the amount declared must be the same per share. Decisions to pay dividends are made at board meetings by the Directors of the company and must be minuted and approved by shareholders and a dividend voucher raised and filed, these are the dividend dates. The voucher shows the amount you have received and the associated tax credit.

Calculating Tax Due

It's always a complicated area where tax is concerned and dividend taxes are no exception because there is something called a tax credit at 10% which needs to be applied.

Example 1 - Salary £6,000 - Dividend Paid £100,000 - Tax Code 647L

The dividend paid of £100,000 is actually the net because there is a 10% tax credit assumed so you'll need to first gross this value up by dividing by 90 then multiplying by 100 - so the gross dividend in this example is £111,111 with a tax credit of £11,111. To find the tax payable you multiply by 32.5% for the higher rate tax giving £36,111 tax liablilty but as you have the tax credit of £11,111 the actual tax due is £25,000 - an effective rate of 25%. Don't forget you would have already paid corporation tax on this under your profits as the dividends are taken from profits you make from your company.

You will also have your own personal allowances to deduct when making tax calculations so it's best to get an accountant to undertake this work.

You can not claim the tax credit if you do not pay tax or your taxable income is less than your personal allowances as it's a credit against tax due and not a refund.

Dividend payments received must be shown on your personal self assessment tax return under dividend/ distribution (for the total amount received), the tax credit (as shown on the dividend voucher) and the total of these two amounts. You tax liability calculated is shown later on the form.

Dividends and IR35

The IR35 rules were introduced in an attempt for contractors setting up limited companies to mitigate their tax liabilities. If the majority of your work is from one company then it's likely you'll come under the IR 35 rules and be taxed under the PAYE system so you can not pay dividends from your company. Check Inland Revenue for more information.

Tax Advantages

Many single person contractors set up limited companies and pay themselves a minimum wage and tax the rest of their income in the form of dividends to pay less overall tax because there is no national insurance contributions payable when a dividend is paid.

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