Tax On Dividends

Dividends received by a shareholder have already borne corporation tax. To avoid tax being paid twice on the same income, the dividend is treated by the Inland Revenue as though it has paid basic-rate income tax in the hands of the shareholder. For most shareholders, therefore, a dividend is 'tax paid' and no more tax will be payable on it.

On the advice form or 'tax voucher' that the shareholder receives with his dividend warrant there will be a note of how much 'tax credit' is associated with the dividend payment. This tax credit is normally the amount which must be added to the net dividend to bring the total to a gross (before tax) figure. It is this grossed up figure (dividend plus tax credit) which will count as part of an individual's assessable income for tax purposes.

Example

A dividend of £75 is received, and the tax voucher shows a tax credit of £302.14. The shareholder's gross income from this holding is therefore £107.14, on which he is deemed to have already paid £302.14 basic-rate tax, assuming that basic rate is 30%.

It is therefore very important, when considering dividend rates, to distinguish between the cash dividend, which is the net amount received after tax, and the dividend plus tax credit, which is the gross amount. Dividends and yields quoted in the newspapers are based on the gross figures. On the other hand the voucher that accompanies the dividend warrant customarily declares the dividend at the net rate of actual cash paid.

• Dividends
• Equities