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Dividends paid by UK companies carry a non-repayable tax credit equivalent to one ninth of the dividend. This means that a basic rate taxpayer has nothing further to pay and a higher rate tax payer pays additional tax at an effective rate of 25%. Dividends from non-UK companies, however, do not currently carry a tax credit and so a basic rate taxpayer will be liable at 10% and a higher rate taxpayer will pay 32.5%.

It was previously announced that from 6 April 2008, provided the dividends did not exceed £5,000 a year, non-UK dividends would carry the same tax credit for shareholders who own less than 10% of the company. Today’s Budget announcement has removed the £5,000 limit. It is not clear what happens where foreign tax has been paid on the dividends.

In addition, the tax credit will be available, from 6 April 2009, for shareholders with more than 10% provided that the source country levies a tax on corporate profits similar to corporation tax. Further details can be found here.

Remittance basis

When the legislation relating to the taxation of overseas dividend was re-written in 2005 an error was made so that remitted dividends (for those claiming the remittance basis) were taxed at 32.5% rather than 40% as they had been in the past. Today’s Budget has announced that this will be corrected with effect from 6 April 2008. The Budget Notice can be found here.