Tax on UK and Foreign Dividend Income 9


How dividends are tax for UK residents can be a tricky subject for many, but here I will explain how both UK and Foreign dividends are treated for different tax bands. This post relates to the old dividend tax rules that involved a tax credit. For the new tax rules on Uk dividends which took effect on 6 April 2016, see the following post: http://moneygrower.co.uk/2016/04/the-new-dividend-tax-rules-5000-tax-free-dividend-tax-credits/

If you want to see the dividend withholding rates deducted by different countries, have a look at this post.

UK Dividends

Many people have the assumption that when dividends are paid, tax is already deducted and you will not have to pay any more taxes. Well this is incorrect. No tax is deducted from UK dividends before they are paid to investors. The ‘gross’ dividend (dividend before tax) is paid to individuals and thus it is the individuals responsibility to pay taxes on the dividends the y receive.

Note that if you own shares in an ISA, you do not have to pay any taxes on dividends.
If you are a basic rate tax payer, you do not have to pay taxes on dividends (read below for more information).

Dividends paid to UK shareholders of UK companies qualify for a non-payable tax credit of one-ninth of the dividend. The tax credit is available to set against the shareholder’s liability to UK tax on that dividend income. The dividend tax credit isn’t repayable because the shareholder hasn’t personally paid any tax, although the company is likely to have paid corporation tax on the profits that it is distributing through the dividend.

As mentioned earlier, the dividend a shareholder receives is made up of a tax credit and the dividend received. UK tax is charged on this based on an individuals tax rate.
Tax rates for dividends are different to the standard income tax rate. The rate charged on dividends is actually lower.

  • For basic rate taxpayers (£0 – £31,785) – Tax Rate is 10%.
  • For higher rate taxpayers (££31,785 – £150,000) – Tax Rate is 32.5%.
  • For additional rate taxpayers (£150,000 +) – Tax Rate is 37.5%

Worked Examples:

John receives £9,000 in UK dividend income for the tax year 2015/2016. How much tax should John pay on this dividend income? We will look at 2 different scenarios here, one where he is a basic rate payer and another where he is a higher rate payer.

As we stated earlier, Total Dividend Income = Tax Credit + Divided Received
So Tax credit is £9000 * 1/9 = £1000
Dividend Received is £9000
So Total Dividend income is £10,000

If John in a basic rate payer:
Charge £10,000 * 10% = £1,000
Dividend tax credit at 1/9 £9000 * 1/9 = £1,000
Tax due on dividend = £0

As we can see, basic rate payers don’t need to pay tax on their dividends

If John in a higher rate payer:
Charge £10,000 * 32.5% = £3250
Dividend Tax Credit £9000 * 1/9 = £1000
Tax due on dividends = £2,250

Foreign Dividends

After 6 April 2008 the rules for foreign dividends changed. From this date, most dividends made by foreign companies to UK resident shareholders will qualify for a tax credit.
In the same way as for dividends paid by UK companies (as shown above), the non repayable tax credit of one-ninth can be set against the shareholders liability to UK tax on that same dividend income.

Tax rates on foreign dividends are the same as tax rates for UK dividends for UK resident individuals.

  • For basic rate taxpayers (£0 – £31,785) – Tax Rate is 10%.
  • For higher rate taxpayers (££31,785 – £150,000) – Tax Rate is 32.5%.
  • For additional rate taxpayers (£150,000 +) – Tax Rate is 37.5%

 

Lets look at an example.

Jane has a foreign dividend of £900 for the tax year 2015/2016.She has paid £90 foreign tax on this.

As we stated earlier, Total Dividend Income = Tax Credit + Divided Received
So Tax credit is £900 * 1/9 = £100
Dividend Received is £900
So Total Dividend income is £1,000

If Jane is a Basic Rate tax payer:

Charge £1000 * 10% = £100
Dividend tax credit at 1/9 £900 * 1/9 = £100
UK Tax due on dividend = £0

Again we can see that there is no tax to pay on dividends for basic rate taxpayers.
The foreign tax cannot be relieved in the UK because there is no tax to pay on this dividend income.

If Jane is a higher rate tax payer:

Charge £1000 * 32.5% = £325
Dividend tax credit at 1/9 £900 * 1/9 = £100
FTCR (see below) = £90
UK Tax due on dividend = 135

In this instance Jane is able to offset the foreign tax paid of £90 against her UK dividend charge, This is done using the Foreign Tax Credit Relief (FTCR) and FTCR is used so that divided income is not taxed twice. You can see more on FTCR below.

If Jane is an additional rate tax payer:

Charge £1000 * 42.5% = £425
Dividend tax credit at 1/9 £900 * 1/9 = £100
FTCR (see below) = £90
UK Tax due on dividend = £235

 

FTCR

If you are taxed on your dividend in a foreign country (depending on the country, , the UK offers Foreign Tax Credit Relief (FTCR) to ensure that you don’t get taxed twice.
The FTCR shareholders can claim is the lower of:

  • The admissible foreign tax paid and allowed by the double taxation treaty (basically the amount of foreign tax you have paid)
    and
  • The UK tax chargeable on the foreign income.

 

So lets say you have income in France of £1000 and you are a basic rate tax payer (20%). If the French authorities, tax you £300. The the amount you can claim is lower of

  • Tax paid in France £300
  • Tax paid in UK (£1000 *20% = £200)

Then you can claim FTCR of £200. This means you have no additional tax to pay in UK.

 

If however you have income from Spain of £1000 and you are a basic rate tax payer (20%) If the Spanish authorities, tax you £50. The the amount you can claim is lower of:

  • Tax paid in France £50
  • Tax paid in UK (£1000 *20% = £200)

Then you can claim FTCR of £50. This means you have £150 (£200 UK tax due – £50 FTCR) tax to pay in the UK.

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  • Daniel

    Does this calculation still stands for the year 2016/17 after the government abolish the tax credit system and replace it with a tax allowance system? I’m looking for information about how foreign dividend will be affected with this new tax allowance system but I can’t seemed to find anything relevant.

    • http://moneygrower.co.uk moneygroweruk

      Daniel, as far as my understanding goes, you will be able to claim the foreign dividend relief only after you receive dividends in excess of £5000. So if all you did was receive £1000 in foreign dividends, than you would not be able to reclaim any foreign dividends paid as you had no UK tax liability on these dividends (the first £5000 is similar to receiving dividends in an ISA as you can’t claim any foreign tax paid on it). If on the other hand you had £8000 foreign dividends, you can set off the foreign tax paid on £3000 (excess above £5000) against your UK tax liability. If you have £5000 UK dividends and £5000 Foreign dividends, you can set the UK dividends against your dividend allowance amount and thus can set off UK tax against the full amount of foreign tax paid.
      This is is just my initial thoughts and we will know for sure how it works once the system kicks in. Hope this helps.

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