The rules surrounding UK dividends have always mystified many people. The artificial dividend tax credit of 10% has caused confusion over the years and if you want to see why, just look at the post I did on the old dividend tax rules. But thankfully, the taxation of UK dividends changed as of the 2016/2017 tax year.
The new rules which take effect as of 6 April 2016 are as follows:
Each individual has a £5,000 tax-free dividend allowance. This means that no tax is paid on any dividend income earned below £5,000.
If dividend income exceeds £5,000, the rate of tax they will need to pay on the amount over £5,000 depends on their tax band. The rates of tax are as follows:
- Basic Rate tax payers – 7.5% on the amount over £5,000
- Higher Rate tax payer – 32.5% on the amount over £5,000
- Additional rate tax payers – 38.1% on the amount over £5,000
To illustrate how dividends are taxed under the new rules, have a look at the example below:
Say John is a basic rate tax payer and receives £6,000 of dividend income. The first £5,000 will be tax free. The additional £1,000 will be taxed at 7.5% and thus John will be liable to pay £75 in tax.
Sally on the other hand is an additional rate ax payer and receives £8,000 in dividend income. The first £5,000 will again be tax free. Sally will need to pay 32.5% on the £3,000 which means that Sally pays tax of £975.
If you have any tax to pay for the dividends you receive in excess of £5,000 you will need to declare this on your self-assessment.
Hargreaves Lansdown has a very handy calculator that allows you to put in your tax bracket and the amount of dividend income you have received in the year. The calculator will then give you your tax liability based on the figures you have input.
Remember that dividends received in your ISA or Pension (SIPP) do not count towards your £5,000 dividend tax free limit. So be sure to make use of these tax shelters in order to get the maximum possible amount without having to pay tax.
Reliefs on Foreign Dividends
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.
Taxation of foreign dividends received by UK based individuals can be a tricky subject as seen by an earlier post I did and thus it is always wise to consult a tax accountant regarding these matters.