Taxing dividends

Taxation of savings

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, after deducting the personal allowance but  including dividends, is less than £31,865 for 2014-15; £32,010 for 2013-14). 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 2014-15 of 45% gives an additional rate on dividends of 37.5% were income is over £150,000.  Again the actual tax payable will reduce to 27.5% after taking into account the 10% tax credit. For 2013-14, the additional rate of tax is 45%, giving an additional rate of 37.5% on dividends, where income is over £150,000. So the actual additional tax payable is 27.5%.

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

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