Question
When the dividend a Company is paying is confirmed in the press in percentage terms, is this what you receive before or after tax?Answer
Dividend percentage yields are shown net of basic rate tax.
The workings are as follows. When companies pay dividends it's out of taxed (or shortly to be taxed) profits. To reflect this they come with an attached 10% tax credit.
The basic income tax rate on dividends is 10%, rising to 32.5% for higher rate taxpayers and 42.5% for top rate taxpayers, all charged on the 'gross' dividend - i.e. the dividend received plus the tax credit. The tax credit can then be offset against the tax owed to give the net tax liability.
Much easier to explain via an example:
Company X pays a 90p dividend which, on a share price of 2000p gives a 4.5% yield. The 'gross' dividend is 90/0.9 = 100p and the 10% tax credit is 10p (100p x 10%).
A basic rate taxpayer must pay 10% tax on the 100p gross dividend, equal to 10p. But the attached tax credit of 10p cancels this out, so no further tax to pay.
A higher rate taxpayer must pay 32.5% on the 100p dividend, equal to 32.5p. The attached tax credit reduces this to 22.5p. A simpler way to calculate the higher rate liability is to multiply the dividend received by 25%, i.e. 90p x 25% = 22.5p.
And top rate taxpayers must pay 42.5%, equal to 42.5p. The attached tax credit reduces this to 32.5p, in other words 36.1% of the dividend received (90p x 36.1% = 32.5%).
The 10% tax credit can never be reclaimed, not even by non-taxpayers or in ISAs and pensions, so it's not possible to enjoy truly 'tax-free' dividends. The advantage of ISAs and pensions is that higher and top rate taxpayers don't have to pay the further tax outlined above.
When the dividend a Company is paying is confirmed in the press in percentage terms, is this what you receive before or after tax?Answer
Dividend percentage yields are shown net of basic rate tax.
The workings are as follows. When companies pay dividends it's out of taxed (or shortly to be taxed) profits. To reflect this they come with an attached 10% tax credit.
The basic income tax rate on dividends is 10%, rising to 32.5% for higher rate taxpayers and 42.5% for top rate taxpayers, all charged on the 'gross' dividend - i.e. the dividend received plus the tax credit. The tax credit can then be offset against the tax owed to give the net tax liability.
Much easier to explain via an example:
Company X pays a 90p dividend which, on a share price of 2000p gives a 4.5% yield. The 'gross' dividend is 90/0.9 = 100p and the 10% tax credit is 10p (100p x 10%).
A basic rate taxpayer must pay 10% tax on the 100p gross dividend, equal to 10p. But the attached tax credit of 10p cancels this out, so no further tax to pay.
A higher rate taxpayer must pay 32.5% on the 100p dividend, equal to 32.5p. The attached tax credit reduces this to 22.5p. A simpler way to calculate the higher rate liability is to multiply the dividend received by 25%, i.e. 90p x 25% = 22.5p.
And top rate taxpayers must pay 42.5%, equal to 42.5p. The attached tax credit reduces this to 32.5p, in other words 36.1% of the dividend received (90p x 36.1% = 32.5%).
The 10% tax credit can never be reclaimed, not even by non-taxpayers or in ISAs and pensions, so it's not possible to enjoy truly 'tax-free' dividends. The advantage of ISAs and pensions is that higher and top rate taxpayers don't have to pay the further tax outlined above.
Read this Q and A at http://www.candidmoney.com/questions/question424.aspx
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