Chapter 4 – taxation of dividend income

Question 1

Taxation of dividend income

Answer 1

There is no tax deducted at source when an individual receives a dividend. Dividends can be taxed at a rate of 0%, 7.5%, 32.5% and 38.1%.
The dividend allowance of £2,000 means the first £2,000 of dividend income is taxed at a nil rate. This allowance is given regardless of whether you are a basic, higher or additional rate taxpayer. The dividend allowance is not an exemption or deduction in arriving at taxable income.
An individual is entitled to the dividend allowance and the savings allowance for interest. The amount of an individual’s dividend income will impact on the amount of savings allowance available to them.
Stock dividends – in order to maintain cash reserves a company can offer the shareholder new shares in the company instead of a cash dividend. Also called strip dividends. If an individual accepts the offer, they are taxed on the dividend forgone – the cash he would have received if he had not chosen the stock alternative.