UK Tax on Foreign Dividends

Remay Villaester (May)
06.07.21
2 minute read

“How foreign dividend tax credit works” is one of the most sought after questions of people who have shares overseas. If you live in the UK, you may have to pay UK income tax on foreign dividends from overseas shares.¹

Although tax treatments of foreign dividends are straight forward, it may get complicated when other countries levy their own taxes on foreign income.²

Let’s plunge into the details to help you find out the basics of UK tax on foreign dividends.

How dividends are taxed in the UK

Typically people receive a dividend payment if they own shares in a foreign company. In fact, they can earn dividend income annually without having to pay taxes each year.³

However, taxpayers don’t have to pay tax on dividend income that is included in the category of personal allowance - it is an income allowance that a person earns each year without any tax. People receive dividend allowance annually and pay tax on dividend income above their dividend allowance. The dividend allowance ranges from £2,000 to £5,000, depending on the year

In the UK, all individuals benefit from a tax-free dividend allowance of £2,000 per year. Income tax is payable on any dividend income received above £2,000, at the rates specified below.

In addition, any amount of dividend income falling within the personal allowance is also tax-free. The personal allowance is currently £12,570 and first applies to non-dividend income.

How foreign tax credits work on foreign dividends

The amount of tax you have to pay on dividends above the allowance depends on your income tax band. This normally range from 7.5% to 38.1%.³

You may be able to claim foreign tax credit relief if you’ve paid foreign tax on the income you’ve received or capital gains that are also taxable in the UK. You can refer to Helpsheet 263 for more information.⁴

How Can you Protect Foreign Dividends with Tax Credits

The good news is that many countries have agreements with the UK to make this process easier. The agreements may vary by country. That is why it is important to consult a tax attorney or professional tax specialist before you make any investments.

In many cases, the HMRC (the UK tax authorities) offers a foreign tax credit to investors to offset the amount paid to tax entities in foreign countries.⁴

Note that the main purpose of foreign tax credits is to prevent double-taxation where taxes have been paid in multiple countries on the same income.

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Summing Up

All in all, don’t forget that tax is a complicated subject. The amount of tax you pay depends on several factors, particularly your personal circumstances. In this regard, the article provides information about UK tax in foreign dividends to improve your understanding and protect foreign tax credits.

However, you must seek professional assistance to clear up any specific issue related to tax on foreign dividends in the UK.

Sources

  1. gov.uk - Tax on foreign income
  2. gov.uk - Taxed twice
  3. gov.uk - Tax on dividends
  4. Foreign tax credit relief

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

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