Unpicking the dividend tax tangle

Dividend tax rules can appear among the most daunting, says Cris Sholto Heaton. But the upshot of many of these rules are simpler than you think.

Few people enjoy thinking about taxes. But if you asked investors to pick the tax rules that baffle them most, dividend taxes would probably top the list. A thicket of notional rates, tax credits, effective rates, withholding taxes and other jargon, dividend taxes seem to be designed to be as incomprehensible as possible. Yet the upshot of most of these rules is simpler than it seems.

In the UK, dividend income is taxed at special dividend tax rates that are lower than normal income tax rates. Basic-rate taxpayers pay a 10% rate, higher-rate taxpayers pay 32.5% and top-rate taxpayers pay 37.5%. However, dividends come with a notional tax credit of 10%. This offsets some or all of the tax you'd otherwise pay on the dividend.

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.