Dividends and other company distributions: no tax credits on non-qualifying distributions: example
Example of tax charge on non-qualifying distribution
Michael holds 10000 partly paid up £1 redeemable shares in Bonus plc. The amount paidup is 75 pence per share. The company uses its shareholders funds to credit thepartly paid shares to make them fully paid. Michael has received a non-qualifyingdistribution of £2500, and is treated as having paid income tax on the distribution atthe dividend ordinary rate, that is £250.
Shortly afterwards, Bonus plc repays 25% of its share capital. Michael now holds 7500shares and has received a qualifying distribution of £2500. The tax credit is £278 (2500x 1/9) making a gross amount of £2778. Tax at the dividend ordinary rate of 10% is £277,of which £250 has been satisfied by the notional income tax on the non-qualifyingdistribution.
Liability at dividend upper rate
If Michael is liable at the dividend upper rate the tax payable on the non-qualifyingdistribution will be
|2500 @ 32.5%||812.50|
|Less notional tax||250.00|
|Additional tax due||562.50|
Michaels liability on the qualifying distribution will be on the gross distributionof £2778 (2500 + the tax credit of 278).
|Gross distribution 2778 @ 32.5%||902.85|
|Less tax credit||278.00|
|Less tax paid on non-qualifying distribution||562.50|
|Additional tax due||62.35|