Declaration of a Dividend
It is essential that whenever a company pays a dividend to a shareholder, it must be formally declared at a director's meeting and if a final dividend (as opposed to an interim dividend) is paid approval is required from the shareholders in general meeting.
It is important that board minutes and dividend counterfoils are prepared whenever dividend payments are made because if the HMRC ask for these and they are not available they would almost certainly argue that the payments were not in fact dividends at all but payments of net salary, which should be grossed up for income tax and national insurance.
There are three different Income Tax rates on UK dividends and the rate payable depends on whether overall taxable income of the shareholder (after allowances) falls within or above the basic or higher rate Income Tax limits. The basic rate Income Tax limit is £45,000, and the higher rate Income Tax limit is £150,000, for the 2017-18 tax year.
Dividend Tax Rates 2017-18
Dividend income at or below the £45,000 basic rate tax limit - 7.5% tax rate (after deduction of personal allowances).
Dividend income at or below the £150,000 higher rate tax limit - 32.5% tax rate (after deduction of personal allowances).
Dividend income above the higher rate tax limit - 38.1% tax rate (after deduction of personal allowances).
How Dividends Are Paid
When you get your dividend you also get a voucher that shows:
- The dividend paid and amount received
- The amount of associated 'tax credit' (see below)
Dividend Tax Credit
Companies pay 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 a shareholder adds up his overall taxable income he will need to include the sum of the dividend(s) received and the tax credit(s). This income is called the 'dividend income'. The dividend paid represents 90 per cent of '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'.