UK-based individuals pay tax on dividend income from UK companies based on a progressive system. Whether the dividends are from a company, a unit trust or an open-ended investment company, the tax rates are the same. However, any dividend income incurred from a region other than the UK is considered ‘overseas income’. This includes dividend income from the Channel Islands and the Isle of Man, which are also considered separate jurisdictions.
In the past, any individual who received overseas dividend income had to pay tax on it both in the country in which it was procured and in the UK. In order to relieve this double-counting, the British government has signed several “double taxation agreements” with countries that allow relief at varying rates. Initially, even where a taxation agreement exists with an overseas government, an amount of tax still has to be paid to that government, in spite of the existence of a taxation agreement; this is called ‘withholding tax’. When an investor receives a dividend in such circumstances, he or she can then apply for reimbursement of some or all of this withheld tax, as agreed by the British government.
The same situation occurs when a mutual fund receives dividend payments from overseas entities. As at 9 April 2009, the UK had double-taxation agreements in place with 111 countries. Each case should be considered individually as these rates are subject to change at any time. For example, residents from countries that do not have agreements with France pay a withholding tax of 25% on dividend income. The UK has an agreement that allows investors to reclaim 10% of this tax, so the effective maximum rate is 15%. Similarly, Switzerland has a standard rate of 35%, whereas the rate for a UK resident is 15%. Again, if there is no agreement, then the full amount of tax can be withheld. All agreements are clearly subject to change.
This is for information purposes only and is not intended as tax advice. Tax treatment may depend on your individual circumstances, and may be subject to change.