Documente Academic
Documente Profesional
Documente Cultură
CHAPTER 4
In this chapter you will learn how UK dividends are taxed, covering in particular:
– the dividend allowance
– the rates of tax for dividend income
– how to treat stock dividends
4.1 Introduction
We keep dividends separate in the income tax calculation because they are
charged at different rates of tax to non-savings income and interest. Dividends are
always taxed as the top slice of a taxpayer's income. This means that dividends will
be taxed after non-savings income and interest. ITA 2007, s.16
There are four possible rates of tax which can apply to dividend income in
2018/19. Dividends can be taxed at the dividend nil rate of 0%, the dividend
ordinary rate of 7.5%, the dividend upper rate of 32.5% or the dividend additional
rate of 38.1%. ITA 2007, s.8
For 2018/19, the dividend allowance of £2,000 applies to the first £2,000 of an
individual’s taxable dividend income. ITA 2007, s.13A
Dividend income within the dividend allowance is taxed at the dividend nil rate of
0%.
Any remaining dividends in excess of the dividend allowance falling below the
basic rate limit are charged at the dividend ordinary rate of 7.5%. Any dividend
income in excess of the basic rate limit but below the higher rate limit is charged
at the dividend upper rate of 32.5%. Any dividend income in excess of the higher
rate limit is charged at the dividend additional rate of 38.1%.
Illustration 1
£
Employment income 30,000
Dividends 25,000
Tax
18,150 @ 20% 3,630
2,000 @ 0% Nil
14,350 @ 7.5% 1,076
34,500
8,650 @ 32.5% 2,811
7,517
Maria’s non savings income (after deduction of the personal allowance) is taxed
first and falls wholly within the basic rate band. The remainder of the basic rate
band is utilised by dividend income. However, the first £2,000 of dividend income
falls within the dividend allowance and so is taxed at 0%. The next £14,350 of
dividend income falls within the basic rate band and is taxed at 7.5%. The
remaining dividend income is taxed at the dividend upper rate of 32.5%.
Another example of where in order to achieve maximum tax relief the personal
allowance is not allocated in full to non-savings income in priority to other income
is where net non-savings income is more than the basic rate band (£34,500) but
less than the total of the basic rate band plus the personal allowance (£46,350)
and dividend income, of more than £2,000, is of an amount such that the taxpayer
is a higher rate taxpayer.
If the dividend income is not sufficient to utilise the dividend allowance and the
balance of the personal allowance, then the excess personal allowance should
also be allocated to non-savings income.
Illustration 2
£
Salary 44,850
Dividend income 15,000
Firstly, we will calculate the liability if we allocate the personal allowance in full to
the non-savings income:
Tax
33,000 @ 20% 6,600
1,500 @ 0% Nil
34,500
500 @ 0% Nil
13,000 @ 32.5% 4,225
Tax liability 10,825
Now, we will compare the position if we reduce the non-savings income to the
level of the basic rate band and allocate the remainder of the personal
allowance to the dividend income.
Tax
34,500 @ 20% 6,900
2,000 @ 0% Nil
11,500 @ 32.5% 3,738
Tax liability 10,638
By allocating the personal allowance in this way we have saved tax of £187. This is
because an additional £1,500 of the dividend allowance saves tax at 32.5%.
Although an additional £1,500 of income is taxed at 20%, £1,500 less income is
taxed at 32.5%, giving a net saving of £187 (£1,500 @ 12.5%).
When determining whether an individual has higher rate income for the purposes
of establishing the amount of savings allowance available, dividend income which
is taxed at the dividend upper rate (or would be, apart from the dividend
Interest can be charged at four possible rates of tax, being 0% (the starting rate
where taxable non-savings income is less than £5,000 and the savings nil rate
where interest falls within the savings allowance), the basic rate of 20%, the higher
rate of 40% and the additional rate of 45%.
Dividend income can also be charged at four possible rates of tax, being the
dividend nil rate of 0% (where the dividend falls within the dividend allowance),
the dividend ordinary rate of 7.5%, the dividend upper rate of 32.5%, and the
dividend additional rate of 38.1%.
You will see here, therefore, there are seven possible rates of tax applying to
taxable income in 2018/19, being 0%, 7.5%, 20%, 32.5%, 38.1%, 40%, 45%!
Taxable Income
20% 0% 0%
45% 38.1%
Illustration 3
£
Rental income 20,000
UK bank deposit interest 14,000
UK dividends 18,000
Mrs Holder has total taxable income of £40,150 (8,150 + 14,000 + 18,000) which
exceeds the basic rate limit. Therefore, Mrs Holder is entitled to a savings
allowance of £500. She is also entitled to the dividend allowance of £2,000.
Tax
8,150 @ 20% 1,630
500 @ 0% Nil
13,500 @ 20% 2,700
2,000 @ 0% Nil
10,350 @ 7.5% 776
34,500
5,650 @ 32.5% 1,836
Tax liability 6,942
The taxable non savings income is taxed first at 20%. The first £500 of interest
income is taxed at 0% as it falls within the savings allowance. The remainder of the
interest income falls within the basic rate band and is therefore taxed at 20%.
The first £2,000 of dividend income falls within the basic rate band but is within the
dividend allowance and so is taxed at the 0%. The next £10,350 of dividend
income is also within the basic rate band and is therefore taxed at 7.5%. The
remaining dividend income of £5,650 is in the higher rate band and taxed at the
dividend upper rate of 32.5%.
Illustration 4
£
Employment income 133,400
Interest 31,250
Dividends 22,000
Tax
Non savings
34,500 @ 20% 6,900
98,900 @ 40% 39,560
Interest
16,600 @ 40% 6,640
14,650 @ 45% 6,593
Dividends
2,000 @ 0% Nil
20,000 @ 38.1% 7,620
Tax liability 67,313
Where a taxpayer has both savings income and dividend income in excess of the
personal allowance, and some personal allowance remains after offsetting it
against non-savings income, the remaining personal allowance can be allocated
in such a way that the benefit of the starting rate band and savings allowance is
retained. In other words, the remaining personal allowance is offset against savings
income in priority, but only to bring the level of taxable savings income to the
amount of the starting rate band plus the available savings allowance. Any excess
personal allowance is then offset against dividend income.
Illustration 5
£
Rental income 6,000
Interest income 9,500
Dividends 9,000
Tax
5,000 @ 0% (starting rate) Nil
1,000 @ 0% (savings nil rate) Nil
2,000 @ 0% (dividend allowance) Nil
4,650 @ 7.5% 349
349
In order to maintain cash reserves, sometimes a company will offer the shareholder
new shares in the company instead of a cash dividend. These “replacement”
dividends are known as “stock dividends” (also called “scrip” dividends).
ITTOIA 2005, s.409
If an individual accepts new shares in place of the cash dividend, the individual is
taxed on the dividend foregone – i.e. on the cash he would have received had he
not chosen the stock alternative. This “pretend” dividend is thereafter treated as a
“normal” dividend and is taxed at the appropriate dividend rates.
Under s.412 ITTOIA 2005, where the difference between the cash dividend
alternative and the share capital's market value equals or exceeds 15% of that
market value, then the shareholder is charged to income tax on the market value
of the share capital and not the dividend alternative. ITTOIA 2005, s.412(2)
Illustration 6
Stephanie has 10,000 shares in PDQ plc. On 5 June 2018 the company announces
a dividend of 10p per share.
PDQ plc also offers their shareholders a 1:20 stock alternative. The price of the
shares in June 2018 was £2.50.
or
A “1:20” stock alternative means that Stephanie can take 1 new share for
every 20 she holds i.e.
Assuming Stephanie accepts the new shares “in lieu” of the cash, she will have
accepted an “enhanced” stock dividend (the difference of £250 is more than 15%
of the new shares’ market value ie 15% × 1,250 = £188).
The shareholder will also be taxed on the market value of the shares, instead of the
cash dividend where the new shares are worth at least 15% less than the cash
dividend. This is unusual as shareholders will rarely be tempted to accept new
shares instead of a larger cash dividend.
EXAMPLES
Example 1
£
Salary (PAYE £3,900) 29,000
Bank deposit interest 20,000
UK dividends 4,500
Example 2
£
Salary (PAYE £40,000) 120,000
Bank deposit interest 25,000
UK dividends 20,000
Example 3
The share prices at the date of the dividend announcements were as follows:
Mr Forest has no other income in the year apart from building society interest of
£10,500. Mr Forest takes the stock alternative where available
ANSWERS
Answer 1
Tax
17,150 @ 20% 3,430
500 @ 0% Nil
16,850 @ 20% 3,370
34,500
2,650 @ 40% 1,060
2.000 @ 0% Nil
2,500 @ 32.5% 813
Tax liability 8,673
Less: PAYE (3,900)
Tax due 4,773
Answer 2
Tax
34,500 @ 20% 6,900
110,500 @ 40% 44,200
2,000 @ 0% Nil
3,000 @32.5% 975
150,000
15,000 @ 38.1% 5,715
Tax liability 57,790
Less: PAYE (40,000)
Tax due 17,790
Tutorial Note:
Answer 3
£20,000 is taxable as the difference between the cash dividend and the
shares‘ market value (i.e. difference of £10,400 (£20,000 − £9,600) is greater
than £3,000 being 15% of the shares’ market value)
£720 is taxable as difference of £30 < 15% of shares' market value being
£113.
Summary of dividends: £
Wood plc 15,750
Copse plc 20,000
Sherwood plc 720
Total 36,470
Tax
5,000 @ 0% Nil
500 @ 0% Nil
2,000 @ 0% Nil
27,000 @ 7.5% 2,025
34,500
620 @ 32.5% 202
Tax liability 2,227
DIVIDENDS
Taxable dividends falling within the dividend allowance of £2,000 are taxed at the
dividend nil rate.
Dividends in excess of the dividend allowance are taxed at the dividend rates as follows:
Dividends within the dividend allowance utilise the basic and/or higher rate bands as
normal.
The third column in the proforma is used to help us with the calculation.
Foreign dividends must be ‘grossed up’ to take account of any foreign withholding tax.
STOCK/SCRIP DIVIDENDS
A taxpayer may be offered a stock dividend (or called a scrip dividend) whereby he will
be given shares rather than cash.
The cash forgone will still be treated as a dividend and taxed in the normal way.
(s.412(1) ITTOIA 2005)
If the market value of the shares differs from the cash forgone by 15% or more of that
market value, then the market value is used as the taxable dividend figure instead of the
cash forgone. This is known as an enhanced stock (or scrip) dividend.
(s.412(2) ITTOIA 2005)