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UK Tax on Foreign Dividends – Rates & Reliefs

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Do I have to Pay Tax on Foreign Dividends? The Changes, Rates & Reliefs

Introduction

We are often asked how a UK taxpayer deals with tax on foreign dividends. As such, we have decided to set out a brief guide below.

Changes to the taxation of dividends

Following on from significant changes to UK taxation of dividends that took effect from  6th April 2016 it is no longer necessary to go through the dance of grossing up dividends to take account of the notional tax credit.

Accordingly, one no longer gets credit for this pretend credit either.

The dividend allowance

As part of the same ‘package of measures’ each person will also be entitled to a new tax-free dividend allowance.

This was introduced at a level of £5,000 of dividend income per person. However, it took just 12 months for a chop to this allowance to be announced. From tax year 2018/19 it is just £2,000 per person.

The dividend allowance applies to both UK dividends and also calculating the liability to tax on foreign dividends.

Tax rates 

Where dividend income exceeds the dividend allowance then income tax is chargeable at the following rates:

Band in which the income fallsTax rate applicable
Basic rate band7.5%
Higher rate band32.5%
Additional rate band38.1%

 

Foreign tax relief

Of course, one might also have suffered foreign tax on foreign dividends.

HMRC cannot refund foreign tax suffered on these foreign dividends. But where foreign tax has been deducted from income subject to tax in the UK then it might be possible to claim Foreign Tax Credit Relief.

Where one can obtain Foreign Tax Credit Relief then this will ultimately lower the amount of UK tax you will need to pay on your UK tax return.

You can only claim Foreign Tax Credit Relief where either:

  • there is a double taxation agreement between the relevant countries allowing them to tax the same item of income; or
  • where there is no double taxation agreement in operation or it simply does not apply: In this scenario, HMRC can provide for unilateral relief.

Where there is a double tax agreement in force then one needs to review it. Some agreements may limit the amount of foreign tax for which you can claim relief. This will depend on the specific treaty.

The receipt of any foreign dividends should be reported on the ‘Foreign’ section of your Self-Assessment tax return. You should also make any claim for Foreign Tax Credit Relief on the same pages as well.

 

If you have any queries regarding tax on foreign dividends, tax on dividends generally or on any other tax matter then please do not hesitate to get in touch. or read more about Income Tax below…

2 Comments:

  • I am 100% shareholder in a US (New Jersey) Corporation and i am a UK resident.
    The US company pay withholding tax of 5% on dividends distributed to me. Can I claim 100% of the withholding tax in my UK self assessment? (I am paying ordinary UK tax rate on the dividends I receive from the US so being taxed twice).
    Thanks

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