Dividend Taxes

Introduction

Like most business activity around the globe, dividends are taxed according to each country’s specific rates, as they are a form of income. They are typically paid out quarterly to those holding shares in a company, and so are taxed quarterly. 

Different countries have different rates of taxes, with Ireland boasting a hefty 51% tax rate on dividends, whereas countries such as Greece and Slovakia levy a tax rate of 5 and 7 percent respectively, with an average rate of 23.3% in European OECD countries. 

Tax Systems in the UK and US 

One example of a tax rate system would be in n the US, where dividends are classified into two categories: qualified dividends and nonqualified (ordinary) dividends. This distinction is quite important, as the tax paid on these dividends varies greatly as the dividend value goes up. The former is taxed at the income tax rate, whereas the latter is taxed at the capital gains tax rate. This difference is significant, as the capital gains tax rate is so much lower than the income tax rate. For example, the capital gains tax doesn’t tax up to $40,400, whereas the income tax rate applies a 12% tax to that. At the higher end of the brackets, on payments equal or greater than $523,601, the income tax rate is 37%, compared to only 20% which the capital gains tax offers – almost half the percentage. 

Many dividends meet the requirements to be qualified; that it should be paid by a U.S. company, or a company that is in U.S. possession, and that the holding period for the shares have been met. Those that don’t meet those requirements are classed as nonqualified, and thus subject to a higher tax rate. 

Also, in the UK, dividend taxes are paid like income tax. There is a personal allowance (for income tax this is £12,570, but for dividends this is £2000), as well as bands. The basic rate is 7.5%, the higher rate is 32.5%, and the additional rate is 38.1%. These rates are paid depending on how high your taxable income (dividends + wages) is above your personal allowance. 

Penalties Of Tax Evasion 

Whether such rates are warranted is an entirely different question, although if these are not paid, or are evaded, then the punishment can vary from paying up to 200% of the original tax, to jail time, at least according to the UK Criminal Finances Act of 2017. 

In the US, the IRS doesn’t tend go after those who can’t pay their taxes, but rather those who do have the capacity, and are simply leaving their assets unreported, or understating the value of dividends paid out, and so can pursue punishments such as jail time or very large fines. Tax codes around the world vary in both size and complexity. Hopefully this article provides some more clarity on the taxes surrounding dividends, and act as a useful source of information for those who are either looking to work in tax and accountancy as a career, or those who are considering dividend growth investing as a source of income. 

Usman Arif, King’s College London

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