Withholding tax

Put simply, a withholding tax requires a person or company making a payment to someone else to withhold part of the payment and pay it to the government.

For example, the UK's Pay As You Earn (PAYE) system, whereby salaried staff receive their wages net of tax, is a form of withholding tax, although it's rarely described as such. In the UK, there is no requirement to deduct withholding tax from dividends (with the exception of real-estate investment trusts).

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However, if you own shares in companies listed overseas, you may well find that withholding tax is applied in that country, at rates that vary, depending on the country in question. Double taxation deals should enable UK investors to claim back at least part of this withheld income, but it's not always straightforward to do so.

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