What tax is payable on dividends?

9 March 2012

If you run a limited company, there may well be further personal tax to pay on the dividends receive.

You settle any dividend tax liabilities via the annual self assessment process. The self assessment return will show gross dividends – that is, the payments actually made plus a 10% tax credit.

Dividend tax rates

All company dividends are taxed the same way. The rates applicable are aligned to the tax thresholds as follows:

• 10% on dividends for income received below the higher rate income tax threshold of £42,475
• 32.5% on dividends for income received above the higher rate income tax threshold.
• A new 'additional' dividend tax rate of 42.5% applies to individuals earning £150,000 or more from April 6th 2010 onwards.

Dividend Tax Credit

The actual rate of tax you pay in dividends will be lower than these headline rates, as gross dividends automatically receive a 10% tax credit. This takes into account the fact that you will already have paid corporation tax on your company profits.

Dividends are paid out of profits after corporation tax and are deemed to have already suffered a 10% tax charge which is shown as a tax credit on the self assessment return to reduce the tax owed.

This means there is no further tax to pay on dividends received for basic rate tax payers, as the 10% tax credit cancels out the 10% 'dividend ordinary rate'.

For higher rate taxpayers, the dividend tax liability will effectively be 25%.

For any dividend income falling within the new additional rate band, the effective tax rate on that proportion of your income is 36.1%.

How much dividend tax to pay?

If you have £30,000 in your company to distribute as dividends (the 'net dividend amount') to a sole shareholder (you), firstly you must multiply this amount by 100/90 to give you a 'gross dividend amount' of £33,333.33.

You will receive a notional tax credit in your self assessment return of £3,333.33 (10% of this amount).

To work out your tax liability as a basic rate taxpayer, you take 10.0% of your gross dividend amount, which in this case is £3,333.33

You then subtract your 10% tax credit of £3,333.33, leaving an additional total tax liability of zero. For higher rate payers, the additional tax is 25% of the net dividend.