I'm a bit confused how dividends are taxable.

Assuming I want to take ~£30k dividends ('tax credit' excluded) on which I will use my ~£10k personal allowance. Do I pay any income tax from it (from the rest ~20k)?

Normally there is 20% of basic rate on income above Personal Allowance, however in here I can find that it's 10% (Dividend ordinary rate), then in here that there is 0% on dividend tax rates if I'm on Basic rate (which I am as it is up to £31,785).

So theoretically I don't pay income tax on ~£30k dividends (without counting any other income), but then what's the point of 10% 'tax credit' which is always added on the top of each dividend value?

Can anybody explain that in plain English based on the above scenario (getting £30k dividends with £10k Personal Allowance), how it's exactly taxable if so?



Mr D receives a dividend of £100 cash from his Limited Company. The way tax credits work means that this actually represents only 90% of the tax charge so to work out the taxable income it needs to be ‘grossed up’ to 100%. You do this by taking the 100, dividing it by 90 then multiplying it by 100, giving £111.11. For the purposes of a tax return this is the dividend income.

Next you need to think about how much tax should be paid. This depends on which tax bracket you fall into:

Basic rate tax payers pay 0% on dividends

Dividend income = £111.11

Incurring tax of:

Tax charge at 10% = £11.11

Less 10% tax credit = -£11.11

Tax due = £0

So as I said this results in income tax of 0%. Though on your tax return you have to go through all those steps.

As the author puts it, just the vagaries of ministers and to confuse mere mortals. Primarily the credit is because you have already paid corporation tax on the income, so a bit of relief and not to tax you twice.

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