Let’s Talk Dividends…
If your company gets paid dividends by other businesses, you might be wondering—does this count as taxable income?
Here’s the good news: in most cases, UK companies don’t have to pay corporation tax on dividends they receive. Yep, it’s usually tax-free income!
But here’s the catch—many business owners miss out because they don’t fully understand the rules or how to make the most of these exemptions.
In this guide, we’ll explain how dividend tax works for companies, when exemptions apply, and how to make sure you’re not handing more over to HMRC than you need to.
Let’s get into it!
What is Dividend Income
Dividend income is considered taxable income for shareholders. The tax rate on dividend income depends on the shareholder’s tax band, with basic rate taxpayers paying 8.75% and higher rate taxpayers paying 33.75%. Shareholders who receive dividend income above the personal allowance may need to complete a self-assessment tax return to report their income and pay any tax due. It’s essential for shareholders to understand their tax obligations and consider seeking professional advice to ensure they are meeting their tax requirements.
When it comes to dividend income, it’s important to remember that it is considered taxable income for shareholders. The tax rate applied to this income depends on the shareholder’s tax band. For basic rate taxpayers, the rate is 8.75%, while higher rate taxpayers face a rate of 33.75%.
If your dividend income exceeds the personal allowance, you may need to complete a self-assessment tax return to report this income and pay any tax due. This process can be complex, so it’s often beneficial to seek professional advice to ensure you’re meeting all your tax obligations and taking advantage of any available tax deductions.
What Exactly is UK Corporation Tax on Dividends Received?
UK corporation tax on dividends received refers to how dividend income is taxed when one company receives dividends from another company. The current system operates on what’s called a “participation exemption” basis, meaning most dividends that UK companies receive aren’t subject to corporation tax and are treated in the same way as other exempt income.
This exemption system was designed to prevent the same profits being taxed multiple times as they move between companies. Small companies typically get automatic exemption on most dividends they receive, while larger companies need to meet certain conditions.
Without these exemptions, dividends would be taxed at the standard corporation tax rate - currently 25% for most companies. Fortunately, the exemptions are widely available for businesses of all sises.
How Does the Dividend Exemption Actually Work?
For most UK companies, dividends received from other UK companies are automatically exempt from corporation tax, with no additional paperwork needed. Foreign dividends from companies outside the UK can also be exempt, though the rules are a bit more specific.
The system works differently depending on whether your company is classed as “small” or “large”. Small companies generally have it easier with more automatic exemptions. This exemption covers both interim dividends paid during the financial year and final dividends paid after year-end.
Additionally, any chargeable gain from the sale of shares in a UK holding company may be subject to capital gains tax, depending on the tax residence of the seller.
The current system is much simpler than the old dividend tax credit system that was used years ago. In my experience advising small business owners, this simplification has removed significant administrative burden for many companies.
What Conditions Do Larger Companies Need to Meet?
If your company isn’t classed as “small”, large companies must ensure dividends fall into one of five exempt classes to qualify for exemption. The most common exemption applies to dividends from companies that aren’t themselves classified as “small”.
Another common exemption covers dividends from companies where you have control, generally meaning you own more than 50%. There’s also a “portfolio holding” exemption for situations where you own less than 10% of the shares.
Distributions from investment funds and Real Estate Investment Trusts (REITs) follow different rules altogether. Additionally, HMRC has anti-avoidance rules to prevent companies from setting up artificial arrangements just to claim these exemptions.
When Might You Still Have to Pay Tax on Dividends?
Not all dividends qualify for exemption. If the dividend is tax-deductible for the paying company, it probably won’t be exempt. Some dividends from non-UK companies might not qualify, especially if they’re from countries with very different tax systems.
UK resident companies are subject to corporation tax on their worldwide profits, which includes certain foreign dividends that may not qualify for exemption.
Distributions that are really a return of capital rather than a distribution of profit might not be exempt. Furthermore, if HMRC decides you’ve set up artificial arrangements just to claim the exemption, they may challenge this.
Companies that receive dividends as part of their trading activity, like financial traders, have different rules to follow. It’s worth checking your specific circumstances if you fall into this category.
How Does Company Dividend Tax Compare to Personal Dividend Tax?
The corporate dividend exemption is much more generous than what individuals get. People only have a small dividend allowance before tax kicks in, whereas companies often enjoy full exemption. Individuals pay dividend tax at rates of 8.75%, 33.75% or 39.35% depending on their income band.
The amount of dividend tax payable by individuals is influenced by their total income, which determines their income tax band.
This difference in treatment means the way you structure your business can have a big impact on your overall tax bill. If you take dividends from your own company, you’ll still pay personal tax on these at your individual rates.
Many business owners time their dividend payments carefully to manage their personal tax position. This strategic approach can lead to significant tax savings when implemented correctly.
Final Thoughts on Corporate Dividend Taxation
Understanding how UK corporation tax works on dividends received can save your business significant money. Most UK companies will find their dividend income is exempt from corporation tax, but it's worth checking the specific rules that apply to your situation.
If you're unsure about any aspect of dividend taxation, getting professional advice can be well worth the investment. With proper planning, you can ensure your business structure is tax-efficient while staying fully compliant with HMRC requirements.
Pie is the UK's first personal tax app designed specifically for working individuals struggling with tax burdens. It's the only self assessment solution offering integrated bookkeeping, real-time tax figures, simplified returns, and expert advice when you need it.
Why not check out Pie.tax today and see how they can help make your tax affairs simpler?
