Dividends paid by Foreign Companies Print
As for dividends paid by UK companies there is no notional tax credit on foreign dividends, and there is no reduction to the tax payable for any notional tax credit.
The tax-free Dividend Allowance applies in respect of dividends paid by overseas companies in the same way as for dividends paid by UK companies.
On dividend income in excess of £2,000 income tax is charged at the following rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
If foreign withholding tax is deducted from the dividend this can be claimed as a credit against the UK tax liability. Where there is a double tax treaty between the UK and the territory of residence of the paying company the credit claimed in the UK is limited to the treaty rate of withholding. So if tax is withheld at the non-treaty rate, which may be at a rate up to twice the treaty rate, it is only tax at the treaty rate that can be deducted from the UK tax liability.
Jennifer, a 45% taxpayer receives a gross dividend of £90,000 from a US corporation in July 2021. US Withholding tax of £13,500 at the treaty rate of 15% has been deducted from the dividend. Her UK tax liability for 2021/22 is calculated as follows:
|Dividend from US||90,000|
|Balance £88,000 @ 38.1%||33,528|
|Less overseas tax credit||(13,500)|
Although £2,000 of the dividend income is taxed at 0%, Jennifer is entitled to the full foreign tax credit relief of £13,500 as her UK tax liability on the dividends exceeds this amount.
If the non-treaty rate of withholding (30% in the case of the US) had been deducted from the dividends paid, then the foreign tax credit claimable in the UK has to be restricted to the treaty rate of 15%. Any excess tax withheld would have to be claimed back from the US tax authorities, or foregone.