Taxing dividends

Dividends are taxed differently from other savings income. The main features are:

• Dividend income is taken as the highest slice of savings income; with savings income already treated as the top income slice this means that dividend income is taxed at a persons very highest rate of tax
• Dividends come with a non-refundable ‘notional tax credit’ of 10%. No tax is physically deducted by the payer. This means that even if you have no tax liability, the tax credit on the dividends is not refunded.
• The gross dividend upon which tax is charged is the sum of the net dividend received and the notional 10% tax credit.
• Dividends are taxed at 10% for basic rate taxpayers (i.e. where taxable income, including dividends, is less than £34,370 for 2012/13). As the 10% tax credit is sufficient to pay the tax liability, basic rate taxpayers effectively have no tax to pay on their dividend income.
• The higher rate of tax on dividends is 32.5% (rather than 40%). This means that 40% tax payers have an additional 22.5% to pay when the non-refundable 10% tax credit is taken into account.  This equates to 25% of the net dividend actually received.
• The additional tax rate for 2012/13 of 50% gives an additional rate on dividends of 42.5% were income is over £150,000.  Again the actual tax payable will reduce to 32.5% after taking into account the 10% tax credit.

More information on the taxation of dividends can be found at http://www.hmrc.gov.uk/taxon/uk.htm.