Tax Liability on Dividends in the UK

With the start of the new UK tax year (the UK tax year is the 12-month period beginning on 6 April and ending on 5 April of the following year), the UK government has made some changes to the tax legislation. This article aims to illustrate the updated tax framework for holding and disposing of shares in a private limited company incorporated under UK law.

Below is a brief analysis of the taxes that a shareholder is required to pay most frequently, namely:

1) Income Tax

2) Stamp Duty

3) Inheritance Tax

4) Capital Gain Tax

All references to tax rates, reliefs, tax bands and tax deductions are up to date and refer to the UK tax year 2024/2025.

1) General information on Income Tax

Every shareholder of a private limited company registered in England with the relevant registrar of companies is liable to pay tax on any dividends he receives.

HM Revenue and Customs ( HMRC) treats any dividend received as part of the shareholder’s income, and such dividends increase the taxable base for Income Tax purposes .

Taxable income is the sum of all earnings earned in a tax year (Total Annual Income).

Every taxpayer has a personal tax-free allowance (£12,570 for the 2024/25 tax year and valid until 2028). In other words, anyone with a Total Annual Income of less than £12,570 does not have to pay any Income Tax .

Depending on the amount of Total Annual Income, taxpayers are assigned to a specific tax band and the applicable tax rate is determined accordingly. The thresholds that determine the aforementioned tax bands are as follows :

• Personal Allowance : £12,570.00;
• Basic-rate tax : from £12,571.00 to £37,700.00;
• High-rate tax : from £37,701.00 to £125,139.00; And
• Additional-rate tax : from £125,140.00.

1.1) Dividend tax

Again with reference to tax on income from dividends, each shareholder has a tax exemption on the dividends received corresponding to £500 to be added to the Personal Allowance described above . This means that the shareholder who receives dividends of less than £500 is not required to pay any Income Tax on dividends and that instead the shareholder who receives dividends of a value greater than £500 will pay tax only on the portion of dividends that exceeds £500, provided that the Total Annual Income is greater than the Personal Allowance .

As mentioned above, the applicable tax rate is determined based on the tax band to which the shareholder taxpayer is assigned.

As a result of the increase that occurred in April 2022, the dividend tax is calculated at the following rates:

• 8.75% for taxpayers included in the Basic-rate tax band;
• 33.75% for taxpayers in the High-rate tax band; and
• 39.35% for taxpayers included in the Additional-rate tax band .

2) Stamp Duty – Purchase of shares

Shares in a private limited company incorporated under English law can be purchased electronically via the CREST system (a UK-based securities depository system which holds UK shares and Gilts (UK government bonds), as well as Irish shares and other international securities), or via a paper stock transfer form . In both cases Stamp Duty applies .

The amount of Stamp Duty to be paid depends on the way in which the taxpayer acquires the shares. In particular:

• Purchase by paper stock transfer form . Stamp Duty is set at 0.5% for transfers over £1,000, while it is not due if the value of the sale is less than £1,000.
• Electronic purchase through the CREST system . The Stamp Duty is set at 0.5% of the value of the purchase, whatever the amount.

Please note that Stamp Duty is also not due in the following cases:

• where an employee is transferred shares in the company (or group) for which he works, provided that the maximum value of the same, for each individual employee, does not exceed £50,000;
• in the event of transfer of newly issued shares;
• where the transfer involves Shares in an open-ended investment company, also known as an OEIC (a type of UK-domiciled investment fund structured as a separate company to invest in shares and other securities);
• where units (shares) of a trust are transferred;
• where exchange-traded funds, called ETFs, are transferred;
• where foreign Shares are transferred outside the UK; and
• in case of Donations of shares.

3) Inheritance Tax

In the event that the shares are transferred mortis causa , the heir could be subject to the payment of the Inheritance Tax and consequently the application of this tax must always be verified from time to time. Some transfers are, in fact, totally exempt such as those between spouses and those destined for non-profit organizations .

Where Inheritance Tax is due, the rate is set at 40% of the market value of the shares transferred at the date of death.

3.1) Business Property Relief (BPR)

If the transfer of shares on death is not exempt from Inheritance Tax , when calculating the tax, it is essential to check whether or not Business Property Relief (BPR) applies. BPR, where applicable, reduces the value of the business assets (including shares) subject to tax, and consequently the amount of tax payable. BPR applies where the business assets have been owned for at least two years prior to the transfer.

Reductions vary depending on the type of goods.

In the specific case of the transfer of shares of an unlisted company (including private limited companies ) the reduction is set at 100% of the value of the shares transferred. In other words, under English law, where the transfer concerns shares of an unlisted company, the value of the shares on which the 40% rate is applied, being this reduced by 100%, is equal to zero, consequently no Inheritance Tax is due.

4) Capital Gains Tax (CGT).

Capital Gains Tax or CGT applies to the actual gains made from the sale of shares, which means that the tax payable is based on the shareholder’s actual gain and not on the selling price of the shares. In other words, shareholders are taxed on the amount resulting from the difference between the purchase price of the shares and the selling price of the shares.

For the 2024/2025 fiscal year:

• the CGT relief is set at £3,000, meaning that if the profits from the sale of shares are less than £3,000 they are not taxed; and
• CGT is charged on the amount in excess of £3,000 at the rate of 10% for taxpayers in the basic-rate tax band , and at the rate of 20% for all other taxpayers.

In general, no CGT is due if:

• the shares are transferred between spouses/civil partners or to a charity.
• The sale of:
  • Shares held in an Individual Savings Account (ISA) or Personal Investment Plan (PEP). Both PEPs and ISAs are investment plans introduced by the UK government to encourage investment in UK companies;
  • Shares in employer stock incentive plans (SIPs), in other words plans for awarding shares to its employees;
  • UK Government Gilts (UK government bonds); and
  • Premium bonds.

Finally, it is essential to remember that tax rates are periodically reviewed and therefore it is always good practice to check with a specialized consultant the current tax rules whenever you buy or sell shares. Overall, as highlighted above in relation to Income Tax , in recent years there have been increases due to the specific economic situation that the United Kingdom is facing. The increases for the moment do not seem to cause concern and it can be said that they are within normal limits.

DISCLAIMER : This article provides general information only and does not constitute legal advice of any kind by Macchi di Cellere Gangemi, which assumes no responsibility for the content and accuracy of the newsletter. The author or your contact in the studio are at your disposal for any further clarification.