Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN40 Taxation of personal dividends

Who is likely to be affected?

1   Individuals in receipt of dividends from non-UK resident companies.

General description of the measure

2   Legislation will be introduced in Finance Bill 2008 to simplify the system of taxation for individuals who own foreign shares.

3   Individuals in receipt of dividends from UK-resident companies are entitled under current law to a non-payable dividend tax credit. From 2008 individuals in receipt of dividends from non UK-resident companies will also be entitled to a non-payable dividend tax credit, subject to certain conditions.

Operative date

4   These changes will have effect from 6 April 2008.

Current law and proposed revisions

5   Dividends received by individual shareholders are taxed at rates of 10%, 10% and 32.5% for lower rate, basic rate and higher rate taxpayers respectively.

6   When dividends from UK-resident companies are charged to tax, shareholders are entitled to a non-payable tax credit of one ninth of the distribution under the provisions of section 397 (1) of the Income Tax (Trading and Other Income) Act 2005. Because tax is charged on the gross dividend received, including the tax credit, this lowers the effective rates of tax on these dividends at the personal level to 0%, 0% and 25%.

7   The proposed changes will from 6 April 2008 extend the non-payable tax credit of one ninth of the distribution to individuals in receipt of dividends from non UK-resident companies, subject to certain conditions. A person will qualify for the non-payable dividend tax credit if they own less than a 10% shareholding in the distributing non UK-resident company, and in total they receive less than 5,000 of dividends a year from non UK-resident companies.

8   The Government is also considering whether it is possible to deliver a more general extension of the non-payable tax credit for the small minority of individuals in receipt of dividends from non UK-resident companies who do not meet the conditions outlined above, and if so how to effect that.

Further advice

9   If you have any questions about this change, please contact Andrea Pierce on 020 7147 2591 (email: andrea.pierce@hmrc.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk