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Dividend tax rates 2008-2009

There are two different Income Tax rates on UK dividends. The rate you pay depends on whether your overall taxable income (after allowances) falls within or above the basic rate Income Tax limit.

The basic rate Income Tax limit is £34,800 for the 2008-2009 tax year (£37,400 for tax year 2009-10).

It doesn't matter whether you get dividends from a company, unit trusts or open-ended investment companies, as all dividends are taxed the same way.

But bear in mind that interest distributions from unit trusts and open-ended investment companies are taxed at the rates for savings income - see below.

Tax on savings income

There are two main Income Tax rates on savings income (broadly speaking, bank and building society interest): 20 per cent (the basic rate) or 40 per cent (the higher rate). The rate(s) you pay depends on your overall taxable income. Depending on your personal circumstances, some of your savings income may be taxable at the special 10 per cent starting rate for savings.

• Tax on bank and building society accounts
• Check HM Revenue & Customs up-to-date figures on tax rates Opens new window

How dividends are paid

When you get your dividend you also get a voucher that shows:

If you have agreed to get your dividends paid electronically you may get your dividend voucher in paper or electronic form.

Understanding the dividend tax credit

Companies pay you dividends out of profits on which they have already paid - or are due to pay - tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their 'dividend income'.

When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your 'dividend income'.

How tax credits are worked out

The dividend you are paid represents 90 per cent of your 'dividend income'. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the 'dividend income'.

Dividend income at or below the £34,800 basic rate tax limit (£37,400 for tax year 2009-10)

Paying tax on dividend income

If you pay tax at or below the basic rate

You have no tax to pay on your dividend income because the tax liability is 10 per cent - the same amount as the tax credit - as shown in the earlier tables.

If you pay tax at the higher rate

You pay a total of 32.5 per cent tax on dividend income that falls above the basic rate Income Tax limit (£34,800 for the 2008-2009 tax year)(£37,400 for the tax year 2009-10). But because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit, in practice you owe only 22.5 per cent.

Note that dividend income, like savings income, is taxed after your non-savings income - for example, wages and self-employment profit - at your highest tax rate. If it falls both sides of the £34,800 ( £37,400 for tax year 2009-10) higher rate tax bracket, it will be taxed partly at 10 per cent (and covered by the tax credit) and partly at 32.5 per cent (less the 10 per cent tax credit).

Can you claim the tax credit if you don't normally pay tax?

No. You can't claim the 10 per cent tax credit, even if your taxable income is less than your Personal Allowance and you don't pay tax. This is because Income Tax hasn't been deducted from the dividend paid to you - you have simply been given a 10 per cent credit against any Income Tax due.

Declaring dividend income on your Self Assessment tax return

If you normally complete a tax return you fill in three boxes:

You pay any extra tax owing via either Self Assessment or PAYE (Pay As You Earn), depending on how you normally pay tax.

• Do you need to fill in a tax return?
• Self Assessment - your tax return

More useful links

• Learn about different types of savings and investments
• Planning your personal finances
• Beginner's guide to tax
• Tax on property and rental income
• Check HMRC's current tax rates Opens new window