Dividends received and your Corporation Tax rate

Short version. Many company dividends are exempt, but exemption has conditions. Taxable dividends increase taxable profits. Exempt dividends can still affect the Corporation Tax rate. Do not assume every UK dividend is exempt or every overseas dividend taxable.

Exempt does not mean invisible

Part 9A of the Corporation Tax Act 2009 sets out the exemptions. For the small-company exemption, HMRC identifies conditions covering payer residence, particular interest-like distributions, foreign tax deductions and tax-advantage schemes. Its definition of small company is a tax definition, not simply the micro-entity accounts category. Read HMRC's exemption conditions and follow its links for the detail before deciding your taxable amount.

The rate rules are in a different Act. Section 279G of the Corporation Tax Act 2010 defines augmented profits as your taxable total profits plus exempt distributions of a particular kind, which the CT600 calls exempt ABGH distributions. The thresholds that decide your rate are tested against that figure, not against your taxable profits. So a dividend can never be taxed and still change your bill.

What augmented profits are

Corporation Tax has three outcomes, and augmented profits pick between them:

• Augmented profits up to £50,000: the small profits rate, 19%.
• Between £50,000 and £250,000: the main rate of 25% reduced by marginal relief, which tapers the effective rate up from 19% towards 25%.
• Above £250,000: the main rate, 25%.

Two things follow. The threshold test uses augmented profits, but the tax itself is charged on your taxable total profits, which exclude the dividend. And marginal relief is scaled by the ratio of taxable profits to augmented profits, so the relief is reduced in proportion to how much of your profit is exempt. Both thresholds are also reduced if your accounting period is shorter than 12 months.

A worked example

A company has a trading profit of £40,000 and receives a £30,000 dividend from shares it holds in an unconnected company.

Without the dividend, augmented profits are £40,000, which is under £50,000, so the rate is 19% and the tax is £7,600.

With the dividend, augmented profits are £70,000. That is above the £50,000 threshold, so the company is in marginal relief territory. Tax is still charged only on the £40,000 of taxable profits, at the main rate of 25%, less marginal relief of £1,542.86 (scaled by the ratio of taxable to augmented profits). The tax is £8,457.14.

So a £30,000 dividend that is never taxed still added £857.14 to the bill, purely by changing the rate. Leaving it out would understate your tax and produce a return HMRC can correct. This example assumes the dividend is exempt and the company has the full annual rate limits.

Where to enter it in SimpleCompanyTax

In the profit and loss section of the wizard, enter the total dividends the company received during the period in Dividends received. Use the gross amount actually received, and include dividends from overseas companies as well as UK ones. Enter 0 if there were none.

In the updated workflow, enter Of which taxable dividends, including 0 if all are exempt. If any are taxable, enter how much comes from non-UK companies. We trust your classification, keep the full dividend in the accounts and add only the taxable part to taxable profits. Non-UK taxable distributions go in box 180 and UK taxable distributions in box 205. The eligible exempt remainder goes in box 620. If these controls are not available in your version, do not disguise a taxable dividend as an exempt one.

For example, with £20,000 trading profit and £10,000 dividends, of which £4,000 is taxable, taxable profits are £24,000 and the exempt remainder is £6,000. With full twelve-month limits, no associates, no group exclusion or other adjustments, tax is £4,560. If all £10,000 is taxable, profits are £30,000 and tax is £5,700.

Foreign tax relief is a separate calculation and claim. Do not subtract a foreign tax credit from the taxable dividend to mimic that relief. This workflow does not claim foreign tax credits. If you need that claim, arrange a supported filing route before submitting. Read the HMRC CT600 guide for income boxes and double taxation relief.

The group exception

Section 279G(3) excludes dividends received from a company in the same group, specifically a 51% subsidiary of yours, a company you are a 51% subsidiary of, or a fellow subsidiary. Those are left out of augmented profits, because otherwise the same profit would count twice within one group.

If any exempt dividends came from a company in your 51% group, enter that exempt part in Of which exempt dividends from 51% group companies. Do not include a taxable dividend here. We leave it out of box 620 and out of augmented profits, so it never affects your rate. Dividends from a company that is merely associated with yours (the same person owns both, but neither owns more than half of the other) are not group dividends: they stay in box 620 and count in full. Associated companies affect your rate in a different way, by dividing the limits. See associated companies and your Corporation Tax rate.

Dividends you pay out are a different thing entirely

This article is about dividends your company receives. Dividends your company pays to its own shareholders are not a business expense, do not reduce your Corporation Tax, and never appear in the profit and loss account. They are a distribution of profit that has already been taxed. For where those go and the lawful-distribution check that applies to them, see dividends in your accounts.

This article is general guidance, not tax advice. For the official position see HMRC’s guidance on marginal relief. See also property income and losses and chargeable gains, the other two kinds of income that count towards your profits alongside your trade.