Further information on dividends
Dividends are the share of a company’s profits that it decides to pay to its shareholders, on which they have already paid - or are due to pay - tax. They are an important part of the return from investing in shares, in addition to any increase in the share price. Companies are under no obligation to pay dividends, but they usually choose to do so because dividends provide an incentive to invest in their shares.
Companies typically keep part of their profits back to expand the business and/or increase their reserves, and will then pay out the rest as a dividend. If companies have good investment opportunities, they will tend to keep more of their profits back for this purpose, reducing the amount available for dividends. So the amount of profit companies make and the alternative uses of its profits will help to determine the dividend.
Dividends are usually paid after the half-year and full-year financial results, although some companies pay quarterly. At this time, a company’s board of directors will decide how much to pay per share. At the same time, the ex-dividend date, the record date and the payment date will be announced. The shares entitle the holder to receive a dividend up to the ex-dividend date. (The share price will fall by the amount of the dividend after this date: the shares ‘go ex-dividend’.) The record date is when the company registrar determines who is entitled to receive the dividend: the ‘beneficial owner’. The payment date is the date on which payment of the dividend is made to the beneficial owner.
Dividend and UK income tax
Up to April 2016
The dividend paid represents 90% of the shareholder’s 'dividend income'. The remaining 10% of the dividend income is made up of a tax credit - tax on profits already paid - or due to be paid - by the company. Shareholders are sent a voucher that shows the dividend paid and the 10% ‘tax credit’ which they can offset against any UK income tax due on dividend income. For the 2015/16 tax year, shareholders who have dividends paid direct to bank or building society accounts will be sent one consolidated tax voucher (dividend confirmation from the 2016/17 tax year) with our annual mailing in May, giving them all their BT dividend information for the previous year in one statement. Shareholders who receive dividends by cheque are sent a separate tax voucher/ dividend confirmation with each dividend payment. You can find more information about understanding the UK dividend tax credit and paying UK tax on dividend income on HM Revenue & Customs website.
From April 2016
The Dividend ‘tax credit’ is replaced by a tax-free Dividend Allowance. The Dividend Allowance does not reduce your total income for tax purposes, but it means that you won’t have to pay tax on the first £5,000 of your dividend income (£2,000 from April 2018), no matter what non-dividend income you have. The allowance is available to anyone who has dividend income. Tax on any dividends you receive over £5,000 (£2,000 from April 2018) is payable at the following rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the Dividend allowance.
Dividends received on shares held in an Individual Savings Account (ISA) continue to be tax free.