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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 other income including wages, profits from self-employment, pensions and interest from savings, such as bank and building society interest.

Dividend tax rates 2011-2012

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 £35,000, and the higher rate Income Tax limit is £150,000, for the 2011-2012 tax year.

Dividend tax rates 2011-2012

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 £35,000 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 42.5%

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 four different Income Tax rates on savings income: 10 per cent, 20 per cent, 40 per cent or 50 per cent. The rate you pay depends on your overall taxable income.

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 £35,000 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 or below 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 falls above the basic rate Income Tax limit (£35,000 for the tax year 2011-2012). In practice, however, you only owe 25 per cent of the dividend paid to you. This is because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit.

If you pay tax at the additional rate

From the 2010-2011 tax year you pay a total of 42.5 per cent tax on dividend income that exceeds the higher rate Income Tax limit (currently £150,000). In practice, however, you only owe 36.1 per cent of the dividend paid to you. This is because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit.

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 £35,000 basic rate tax limit, 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).

Declaring dividend income on your Self Assessment tax return

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 HM Revenue & Customs (HMRC).

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.

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