Dividends
From Timetotrade
When a company earns a profit, some of it is reinvested in the business and called retained earnings, and some of it can be paid to its shareholders as a dividend. The most common type of dividend is a 'cash dividend' and these are paid out in form of 'cash'. Such dividends are a form of investment interest/income and are taxable to the recipient in the year they are paid.
Stock or scrip dividends are paid out in form of additional stock shares from the issuing corporation or other corporation (e.g., its subsidiary corporation). They are usually issued in proportion to shares owned (e.g. for every 100 shares of stock owned, 5% stock dividend will yield 5 extra shares). This is very similar to a stock split in that it increases the total number of shares while lowering the price of each share and does not change the market capitalization or the total value of the shares held.
UK Dividends (Domestic)
Source: Direct Gov
Companies pay 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 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 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 |
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.
If you pay tax at the higher rate, you pay a total of 32.5% tax on dividend income that falls above the basic rate Income Tax limit (£33,300 for the 2006-2007 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, is taxed based on your highest tax rate. If it falls both sides of the £33,300 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).
You can't claim the 10 per cent tax credit, if your taxable income is less than your personal allowances 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.
UK Dividends (Overseas)
Source: Direct Gov
If you receive savings and investment income from abroad, you'll usually need to declare this on a Self Assessment tax return. You may have to pay UK Income Tax, but if you've paid foreign tax on the income you may be able to offset (deduct) this. Dividends and interest from overseas companies
counts as 'overseas income' if it comes from outside England, Scotland, Wales and Northern Ireland.
If you find that you're being asked to pay tax both in the country of origin and in the UK, you may be able to claim relief from double taxation by completing the foreign pages section of the Self Assessment return. The UK has signed many double taxation agreements with other countries.
Double taxation agreements usually set out a rate of tax (called 'withholding tax') that a country can charge on a UK resident receiving certain types of income from that country (for example, dividends from companies or interest on savings).
Any claim that you make for relief against UK tax must be restricted to this minimum tax payable under the relevant double taxation agreement. You can find a list of these rates in the notes to the foreign pages of the Self Assessment return.
If you've paid foreign withholding tax at a higher rate than is listed for that type of income, you'll need to approach the overseas tax authority for a refund of the tax paid above the agreed rate.
Further Reading
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