Withholding tax

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.

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).

As a result, dividends may always be paid gross, irrespective of any double-taxation treaties that may come into play. (Double-taxation treaties are agreements between countries to ensure international workers or firms do not end up paying tax twice on the same income.)

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.

Recommended

What are the best ways of raising more money in tax?
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
What are the biggest mistakes investors make when it comes to tax?
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
How tax has shaped the course of human history
Economy

How tax has shaped the course of human history

Taxation is as old as civilisation itself. But how much is too much? Dominic Frisby looks at how taxation, war and society have evolved together over …
16 Oct 2019
Universal Credit comes good
UK Economy

Universal Credit comes good

The government’s benefit reforms have been plagued with disasters since their introduction in 2013. The Covid-19 crisis, however, has revealed a posit…
21 Sep 2020

Most Popular

Oil producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020
The rising dollar is proving bad news for most other assets – will it last?
Investment strategy

The rising dollar is proving bad news for most other assets – will it last?

Precious metals, stocks and pretty much every other asset has taken a tumble as the US dollar strengthens. Dominic Frisby looks at how long this trend…
23 Sep 2020
Why you should stuff your end-of-pandemic portfolio with Chinese stocks
China stockmarkets

Why you should stuff your end-of-pandemic portfolio with Chinese stocks

For an end-of-pandemic portfolio, you need assets that can cope with today’s volatility. And that, says Merryn Somerset Webb, means Chinese stocks.
14 Sep 2020