Tax on dividends

[Tuna]

Just to clear up my understanding, when you are paid dividends, there's an effective 20% tax already applied by the company paying the dividends. So if your earnings are in the 20% band, and the dividends don't take you out of that band, you owe no more tax. If they take you over the 20% band you owe the difference above the 20% already paid.

If however you are not earning, do you get a rebate for the amount of the dividend that comes under the personal tax allowance?

So if I'm earning nothing, I get a 5K dividend, and a 20% rebate (1K) as I'm below my personal tax allowance?

[Eric Mc]

The dividend is paid out of the company's after Corporation Tax profits. So, if the company (say) made a profit of £100,000 it would pay Corporation Tax to HMRC of £20,000 (i.e at 20% CT rate) This would leave £80,000 available to be distributed to the shareholders.

So - say the company decides to pay out all the £80,000 to one shareholder. How is that treated for Income tax purposes?

The shareholder gets the £80,000 transferred to their personal bank account./ They should also receive a Dividend Voucher from the company (a bit like a payslip). The Dividend Voucher will show the following -

Net Dividend £80,000.00
Notional Tax Credit £8,888.88 (10%)
Gross Dividend - £88,888.88

So, you can see that the tax attached to the dividend is actually at 10%. However, it is called Notional Tax because it is not real. All it does is increase the value of the Gross Dividend for the individual's personal Income Tax assessment and calculation.
Because it is a "Notional" tax, it can never be refunded to the individual as it was never physically paid.

The individual will be assessed to Income Tax on teh basis that their Gross Dividend Income was £88,88.88. That part of the dividend income that falls into the Higher Rate tax band is taxed, not at 40%, but at 32.5%.

[Tuna]

Thanks Eric, I can never get my head around this stuff.

[PurpleMoonlight]

To answer the question, no, you cannot use dividend income against your personal allowance and reclaim any tax.

[gregf40]

The tax credit is very confusing.

If you are a 40% tax payer and receive a dividend of 10k you have to pay 2.5k tax (25%).

It is no coincidence that 20% (corp tax) then 25% (personal tax) equates to 40% off the initial company profit.