Since 6th April 1999, all UK company dividends have carried a tax credit of 10%, as the example of Bigyield plc showed.
The 10% tax credit can be set against your tax liability, but your ability to "use" that tax credit, and the amount of additional tax you have to pay on that dividend, depends on whether you are a nontaxpayer, a basic rate taxpayer or a higher rate taxpayer
If your investment income, added to your other income, is below the annual £5,435 allowance (i.e. you are not a taxpayer) you don't have to pay any more tax on the dividend, but unfortunately you cannot recover the tax you've already paid (or which you are credited with having paid). In effect the 10% is lost to the Revenue.
If your investment income, added to your other income, puts you in the basic rate bracket (20%), you might think that there would be more tax to pay, but in fact there isn't. Look at the middle column of the table below, and you'll see that in the £2,321 - £36,000 row the tax on dividend income remains at 10%. You already have a tax credit for that, so there's no more tax to pay.
| Earnings | General Income | Dividend Income |
|---|---|---|
| £1- £2,320 | 10% | 10% |
| £2,321- £36,000 | 20% | 10% |
| Over £36,000 | 40% | 32.5% |
Once your total income takes you into the higher rate bracket (40%) the position is a bit different. You do have to pay additional tax on the dividend income, and the amount you have to pay is whatever lifts the total rate to 32.5%.
Let's assume that your total income is £50,000, so you are firmly in the higher rate tax bracket. In this context a dividend cheque of £90 and a tax credit of £10 is treated like this:
| Cash dividend | £90.00 |
| Tax credit | £10.00 |
| Gross taxable amount | £100.00 |
Apply 32.5% to the gross amount and you get £32.50. Since you have a tax credit of £10, the additional amount payable is £22.50.
Sharp observers will notice that £22.50 is exactly a quarter of £90. A quick way for a higher rate taxpayer to calculate the additional tax payable on a UK dividend is to multiply the net amount received (£90) by 25%.
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