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View the related Tax Guidance about Dividend tax

Cash dividends

Cash dividendsIntroductionA dividend is a distribution of profit by a company to its shareholders.A dividend is not only a payment in cash. It can be the issue of new shares in exchange for forfeiting the right to a cash payment (a stock dividend). For more detail, see the Non-cash dividends guidance note.This guidance note deals with cash dividends from UK resident companies. For more on dividends from non-UK resident companies, see the Foreign dividends guidance note.The taxation of dividends is discussed in the Taxation of dividend income guidance note.Cash dividends from UK resident companiesCash dividends paid by UK companies on or after 6 April 2016 have no dividend tax credit attached, meaning the amount received is the amount which is taxable. The company should issue the shareholder with a dividend voucher showing the number of shares held by the shareholder, the dividend paid and the date of payment.The amount reported in box 4 of the main tax return is the total dividends received from UK resident companies in the tax year (ie the arising basis of assessment). Dividends are reported on box 5.3 of the short tax return, see the Short tax return guidance note.The taxation of dividends is discussed in the Taxation of dividend income guidance note.Note that where certain conditions are met, dividends from non-UK incorporated close companies may be treated for UK tax purposes as if they were UK dividends irrespective of the residence status of the company. See the Foreign dividends guidance note. UK cash

Dividend waivers

Dividend waiversIn certain circumstances shareholders may wish to pay dividends other than in proportion to their shareholdings. This aim is typically achieved by one or more shareholders not taking a dividend when it is declared. To effect this, the relevant shareholders must waive their right to dividends from the company prior to the dividend being declared.Care must be taken when waiving dividends. HMRC may attack this where there is a loss of tax as a result.In order to minimise the risk of HMRC scrutiny when effecting a dividend waiver, the following measures should be taken:•the waiver must be effected by a deed•the deed must be executed before the dividend is declared or paid•the waiver must be ‘commercial’The first two points relate to ensuring that the dividend waiver is effective for the purpose intended. That is, if the waiver is not effected by deed or done retrospectively, the shareholder will still be entitled to the dividend when it is paid. The shareholder will likely have under-declared dividend income on their tax return.The third point relates specifically to the settlements legislation. HMRC will consider that the lack of commerciality of a waiver is an indication that there is an element of ‘bounty’ which is a sufficient characteristic indicative of a settlement. HMRC sets out factors that it considers are highly indicative of the existence of a settlement. HMRC specifically looks for indications such as these, including the following factors:•insufficient retained profits to pay dividends•successive waivers effected

Non-cash dividends

Non-cash dividendsIntroductionA dividend is not only a payment in cash. It can be the issue of new shares in exchange for forfeiting the right to a cash payment (a stock dividend). For more on payments in cash, see the Cash dividends guidance note.The tax treatment of non-cash dividends can be easily overlooked by taxpayers. It is good practice to include a note on this in the initial tax return information request letter or tax return information prompt sheet / checklist.There are two main types of non-cash dividends: stock dividends and dividends / distributions in specie.Stock dividends from UK resident companiesIn order to maintain cash balances, sometimes a company will offer the shareholder new shares in the company instead of a cash dividend. These shares, received in lieu of cash, are known as ‘stock dividends’ or ‘scrip dividends’.Calculating the cash equivalentIf an individual accepts new shares in place of the cash dividend, the individual is taxed on the cash equivalent of the shares received. The cash equivalent is usually the cash they would have received had they not chosen the stock alternative. However, if the difference between the cash forgone and the market value of the new shares is 15% or more of the market value of the new shares, the cash equivalent is the market value of the new shares. See Example 1 and Example 2.The company should send the shareholder a statement showing the dividend forgone and details of the new shares acquired.Ideally, the taxpayer will provide a

Taxation of dividend income

Taxation of dividend incomeIntroductionA dividend is a distribution of profit by a company to its shareholders.A dividend is not only a payment in cash. It can be the issue of new shares in exchange for forfeiting the right to a cash payment (a stock dividend). For more detail, see the Cash dividends and Non-cash dividends guidance notes.For more on dividends from overseas resident companies, see the Foreign dividends guidance note.Dividend income is taxed at dividend income tax rates, which increased by 1.25 percentage points with effect from 6 April 2022. Note that the tax treatment of dividend income in the hands of UK residents is different to the tax treatment of dividend income of non-residents. This is also covered below.Note that the Scottish and Welsh income tax rates and bands only apply to the non-savings non-dividend income (commonly referred to in practice as non-savings income) of Scottish and Welsh taxpayers. As far as the dividend income of Scottish or Welsh taxpayers is concerned, it is the UK tax bands and rates that apply. For the definition of a Scottish taxpayer and a Welsh taxpayer, see the Proforma income tax calculation guidance note.When is a dividend taxable?Whether a dividend is taxable in the UK depends on the circumstances of the individual and whether the dividend is paid by a UK resident company or an overseas resident company.Generally, an individual who is resident and domiciled or deemed domiciled in the UK is taxable on their worldwide income (and gains) in the

Dividends ― planning issues

Dividends ― planning issuesTax liabilities for dividendsThere is generally a tax advantage to extracting profits by way of dividends, often once a salary had been taken to utilise the personal allowance, ensure entitlement to certain state benefits and in certain cases to ensure payment of at least the national minimum wage, see the Salary v dividend guidance note.Dividend planning strategies include consideration of cashflow issues, administrative ease as well as tax savings. Clients whose businesses were previously run in unincorporated forms can find it difficult to adhere to remuneration strategies and need to exercise particular care in this area.A newly incorporated business needs to be aware of the legal requirements for paying dividends, as set out in the Dividends ― payment procedures and practical issues guidance note. Furthermore, it is important to ensure that shareholders are aware of any personal tax liabilities relating to dividends.Higher and additional rate on dividend paymentsOne aspect of dividend planning is the effect of dividends being forced up into the higher tax rates. This is one of the reasons why dividend planning should be undertaken only with reliable estimates of other incomes. It is also a reason why dividend planning is sometimes best left until towards the end of the tax year.The differential between the basic rate and higher rate of income tax on dividends is greater than that for non-savings income and savings. As the top-slice of income, it is also the income that breaches the higher tax rate and additional rate band.The

Income tax during administration

Income tax during administrationLiability of the personal representativesAfter a person’s death, the property of the deceased is vested in the personal representatives (PRs) to enable them to manage and distribute the estate in accordance with the Will or the terms of intestacy. See the Personal representatives guidance note.The PRs act as a single body and represent the estate as a separate legal entity. During the period of administration, income received by the personal representatives is assessed on the estate, and the PRs are responsible for paying the tax due.Just like a UK resident individual, a UK resident estate is liable to income tax on its worldwide income (subject to double tax relief). A non-UK resident estate is liable to income tax on its income arising in the UK. The residence status of an estate depends on the residence status of the PRs and the deceased:•where all the PRs are UK resident, the estate is UK resident•where all the PRs are non-UK resident, the estate is non-UK resident•if the estate has both UK resident and non-resident PRs, it is UK resident if the deceased was UK resident or domiciled at the date of deathITA 2007, s 834See the Domicile for UK inheritance tax guidance note for details of proposed future changes to the domicile rules for IHT after 5 April 2025.Period of administrationThe period of administration runs from the day after the date of death and ends when the estate is effectively wound up.It may not be

Discretionary trusts ― income tax

Discretionary trusts ― income taxIntroductionThis guidance note explains how to calculate the income tax liability on the income of discretionary trusts and any trusts where income may be accumulated. It also covers the general principles of income tax that apply to all trusts and identifies the features specific to discretionary and accumulation trusts.Trustees are together treated as if they were a single person (distinct from the individuals who are the trustees of the trust from time to time). In order to calculate the income tax liability for any trust, you first have to determine what type of trust it is. It is essential when dealing with a trust for the first time to read the trust instrument. As explained in the Taxation of trusts ― introduction guidance note, the income tax treatment will fall into one of the two categories:•standard rate tax (bare trusts and all interests in possession)•trust rate tax (discretionary and accumulation trusts)The nature of an interest in possession and the income tax treatment is detailed in the Interest in possession trusts ― income tax guidance note. In the hands of the trustees, the income is taxed at basic and dividend rates, but it is ultimately charged on the beneficiary at his personal rates, regardless of when and whether the income is paid over to him.Additional rates of tax apply to trustees’ accumulated or discretionary income. This is defined as income which either:•must be accumulated (because of a direction in the trust instrument or

Interest in possession trusts ― income tax

Interest in possession trusts ― income taxIntroductionThis guidance note explains how to calculate the income tax liability on the income of an interest in possession trust. It also covers the general principles of income tax that apply to all trusts and identifies the features specific to an interest in possession trust.Trustees together are treated as if they were a single person (distinct from the individuals who are the trustees of the trust from time to time). In order to calculate the income tax liability for any trust, you first have to determine what type of trust it is. It is essential, when dealing with a trust for the first time, to read the trust instrument. As explained in the Taxation of trusts ― introduction guidance note, the income tax treatment will fall into one of two categories:•standard rate tax (bare trusts and all interests in possession), and•trust rate tax (discretionary and accumulation trusts)The nature of a discretionary interest and the income tax treatment is detailed in the Discretionary trusts ― income tax guidance note. Higher trust rates of tax apply to trustees’ accumulated or discretionary income.The income tax treatment of bare trusts is described in the Bare trusts ― income tax and CGT guidance note.An interest in possession is characterised by a beneficiary’s right to the income of a trust as it arises. The income belongs to the beneficiary, and the trustees have no authority to withhold it except to use it for legitimate expenses. The entitlement

Non-qualifying distributions

Non-qualifying distributionsHistorically, non-qualifying distributions were distributions that did not qualify for a dividend tax credit. This was usually because they could be structured to be paid out of capital rather than out of profits.Non-qualifying distributions have always been relatively rare in practice, as the legislation operates as low-level anti-avoidance to deter this type of distribution. If the taxpayer has received a non-qualifying distribution, it should have been identified as such on the dividend voucher received from the company.Although the dividend tax credit was abolished with effect from 6 April 2016, and the term ‘non-qualifying distributions’ was repealed, this is still a helpful conceptual term to use when thinking about certain distributions that:•fall to be treated as dividend income rather than as capital, and•require income tax relief where they are later linked to a ‘qualifying’ distributionTherefore, the guidance below still uses the term ‘non-qualifying distributions’ as a catch-all term for these types of distributions. However, the post-April 2016 legislation refers to these types of distributions as ‘CD distributions’, meaning that these are distributions which fall with categories C or D of CTA 2010, s 1000. Therefore, a ‘qualifying distribution’ is known as a ‘non-CD distribution’ under the post-April 2016 rules. What are non-qualifying distributions?The best way of understanding non-qualifying distributions (also known as CD distributions) is to look at some examples of transactions that are treated as distributions for tax purposes, but that were not historically eligible for a dividend tax credit.Redeemable bonus sharesNormally, a payment to shareholders

Purchase of own shares ― overview

Purchase of own shares ― overviewThis guidance note discusses the purchase by a company of its own shares (often referred to as a ‘share buyback’ or a ‘purchase of own shares’). This may be considered for a variety of reasons, such as a tax efficient exit route from the company or a simple restructure of share capital. However, there are a number of issues, both legal and tax, that need to be considered before such a transaction is carried out.The repurchased shares can either be immediately cancelled, which is typically the case, or they may in some circumstances be retained by the company (effectively ‘in treasury’). If the shares are retained, companies can sell them for cash (to raise funds or under an option scheme) or transfer them for the purposes of employee share schemes. These shares, referred to as ‘treasury shares’, are dealt with in further detail in the Treasury shares following a share buy back guidance note.The tax treatment for the shareholders in a company on a purchase of own shares will fall into one of two categories ― either the ‘income treatment’ or the ‘capital treatment’. Under the income treatment, the purchase is dealt with as an income distribution (ie a dividend). However, there is an exception for buybacks made by unquoted trading companies where, provided certain conditions are met, the seller is instead treated as making a capital disposal. See the Income treatment for purchase of own shares and Capital treatment for purchase of own