Dividend payments are made by a corporation to its shareholders. The payments are made from the profits of the company to the shareholders. Dividends may also be made from open ended investment companies and unit trusts. Tax rates for UK dividends differ from other rates of tax like income tax and savings tax.

The rate of dividend tax is dependent on the amount of income you have, and is paid at three different rates. The tax rates and income thresholds differ each tax year. For 2011-12, the rate for dividend tax if your income is at or below £35,000 will be 10 percent. If income is above £35,000 but at or below £150,000 the dividend rate is 32.5 percent. If income is above £150,000 the rate of tax charged on dividend income will be 42.5 percent.

When you receive a dividend you will also receive a dividend voucher, which will show the amount of dividend you have been paid, and the tax credit. As dividends are paid from profits made from the company, tax will already have been paid, or is due to be paid. A tax credit is given to the shareholder, which may be offset against any tax which is due to be paid on the dividend. The total dividend received and the tax credit should be included in your final income total. The tax credit you receive will represent 10 percent of the dividend amount.

There will be no further tax to be paid if you are a basic rate taxpayer, but the amount of tax to be paid if you are a higher rate taxpayer will be based on your income level.

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Gary Fields

Content Writer working alongside our expert accountants to bring you the latest Tax and Accounting news.

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