Dividends received and your Corporation Tax rate

Short version. Dividends your company receives from other companies are almost always exempt from Corporation Tax, so no tax is charged on the dividend itself. That part is well known. What is less well known is that the dividend still counts when HMRC works out which rate you pay. A company with a modest trading profit and a large dividend can end up in marginal relief rather than the 19% small profits rate, even though not a penny of tax is charged on the dividend. Enter the figure in Dividends received and we report it in box 620 and apply the rate rules for you.

Exempt does not mean invisible

Under Part 9A of the Corporation Tax Act 2009, most distributions a UK company receives are exempt, and there is no need to work out a credit or a deduction. If you have read elsewhere that dividends received are not taxed, that is correct as far as it goes.

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. Entering it costs you one field.

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.

We show the dividend as income in your accounts, keep it out of your taxable profits, report it in box 620 of the CT600, and use it in the rate calculation. The live tax estimate updates as you type, so you can see the effect immediately, and the tax computation we file shows the working.

The group exception, and why it does not apply to you

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.

SimpleCompanyTax is built for single companies with no subsidiaries and no associated companies, which you confirm when you add a company. So for every company we can file for, the whole dividend counts and there is no group question to answer. If your company is part of a group, we are not the right service and you should speak to an accountant. See which company types we support.

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.