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).

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.